Earnings Call Transcript - SHO Q1 2022

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, May 5, 2022, at 12 P.M. Eastern. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Aaron Reyes, CFO

Thank you, operator, and good morning, everyone. By now, you should have all received a copy of our first quarter earnings release and supplemental, which were made available yesterday. If you do not yet have a copy, you can access them on our website. 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 the 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. With us on the call today are Doug Pasquale, Executive Chairman; Bryan Giglia, Chief Executive Officer; Robert Springer, President and Chief Investment Officer; and Christopher Ostapovicz, Chief Operating Officer. On today's call, Doug will start us off with some commentary on the industry and our company. Bryan will then discuss the current operating environment and recent trends in our business, and provide information on our pending value-add acquisition of The Confidante Miami Beach that we announced yesterday afternoon. Finally, I'll provide a summary of our current liquidity position and a recap of our first quarter earnings results. After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Doug. Please go ahead.

Doug Pasquale, Executive Chairman

Thank you, Aaron. Hello, everyone, and thank you for joining our call. The first quarter marked a notable period of transition for our industry and our company. We are very pleased with the strong acceleration in lodging demand that started in mid-February and continues today. This quarter marks the most significant inflection since the onset of the pandemic. In particular, the return of business travel and corporate group events is encouraging given the composition of our portfolio. We expect that Sunstone will see outside growth this year as demand strengthens and expands beyond leisure travel. In addition to the positive improvements in industry fundamentals, we have implemented important leadership changes at Sunstone. As you know, in early March, the Board of Directors announced the appointment of Bryan as CEO, Robert as President and Aaron as CFO. These talented executives, complemented by an excellent team, will lead Sunstone in what I expect will be an extended period of significant value creation for our shareholders. I am very pleased with the progress we have made with acquisitions, asset sales, and stock repurchases over the last several months. And I believe that our pending acquisition of The Confidante Miami Beach, as well as several other transactions we are currently evaluating, will further position Sunstone for additional meaningful growth and value creation. I'm excited to facilitate the transition, which is going extremely well. The entire Sunstone team, the Board of Directors, and I are all very excited and invigorated by the many opportunities that lie ahead. And with that, I'll turn the call over to Bryan.

Bryan Giglia, CEO

Thank you, Doug, and good morning, everyone. I'll start with a quick review of first quarter operations and then provide some commentary on the current trends we are seeing that point to continued growth for the remainder of 2022. Finally, I will highlight our pending acquisition of The Confidante Miami Beach and its transformation to the Andaz Miami Beach, a premier luxury lifestyle resort. Despite getting off to a slow start in January and early February, due to the lingering impacts of the Omicron variant, demand across our portfolio accelerated meaningfully in the back half of the quarter and contributed to results that exceeded our initial expectations. While our resort properties continue to benefit from sustained high demand and a degree of price insensitivity, we are more encouraged by the resurgence we are seeing at our group-oriented and urban hotels as corporate and event travel is rebounding. Portfolio occupancy increased from only 38% in January to nearly 68% in March, as hotel demand grew more widespread and diversified away from leisure. On the pricing side, our operators have remained disciplined in their revenue management approach and have maintained strong rates with the majority of our hotels at or above 2019 levels in the first quarter. Our comparable portfolio achieved a first quarter average daily rate of $280, a 9.8% increase compared to 2019. This is the highest quarterly ADR ever achieved for these hotels, driven in part by meaningful growth at our resorts in Wailea and Key West. Our two recently acquired Wine Country assets generated a combined first quarter ADR of $1,100, which is ahead of our underwriting and particularly impressive considering it is the seasonally lowest demand quarter for this market. These hotels are positioned to generate significant ADR and EBITDA growth as they move into their high season in the second and third quarters, and initial results are impressive with the Four Seasons Napa running at an average rate of nearly $1,900 in April. In total, our 14-hotel portfolio generated a first quarter RevPAR of $160, made up of a $301 average daily rate at a 53% occupancy rate. Non-room revenue continued to be a bright spot during the first quarter. We once again saw significant sequential growth in food and beverage revenue, which increased 16% from the fourth quarter of 2021. While our first-quarter outlet spend on a per occupied room basis was above 2019, the primary driver of the higher out-of-room spend in the quarter was due to increased banquet contribution from the group activity at our hotels. Banquet and AV sales per group room was $180 in Q1 and was at pre-pandemic levels. We also saw meaningful increases in destination and facility revenue as these programs have now been rolled out to most of our hotels. Including the out-of-room spend, our total portfolio generated an additional $92 of revenue per available room in the quarter for a total RevPAR or TRevPAR of approximately $252. Turning to costs. While we have been successful in reducing certain operating expenses, including the reduction of $14 million to $15 million in annual permanent cost savings, our operators have not been immune from the labor cost pressures that have been impacting our industry. While changes in hotel staffing composition over the last two years made precise comparisons challenging, our data suggests that from 2019 to 2021 average hourly wage rates have increased at an annual rate of approximately 5%. Looking ahead, we anticipate that the growth in wage rates will moderate somewhat in 2022 and should be in the range of 4% to 5%. We recognize there is a need to balance guest and associate satisfaction with optimal service delivery, pricing, and hotel profitability. So we are continuing to work with our operators to benchmark best practices and drive efficiencies where possible. We are also looking for additional areas where we can reduce cost through energy efficiency and waste reduction. The first phase of our solar farm is in place at the Wailea Beach Resort and since installation, it has provided roughly 60% of the hotel's monthly electricity and has saved over $260,000 in utility costs. We are evaluating other sustainability initiatives as projects like these are not only good for the environment, but they are also good for our returns. Despite some cost pressures, our comparable hotels generated a hotel EBITDA margin of 25% during the quarter. While this remains shy of the low 30% range we have historically maintained in the first quarter, we are again very pleased with our operators' ability to deliver this level of profitability with a portfolio-wide occupancy in the low 50% range. This is a notable accomplishment and gives us confidence that we will be able to manage the cost pressures we are seeing and exceed prior peak margins as the operating environment returns to more normalized levels. Now shifting to segmentation. Our comparable portfolio generated 123,000 total group room nights in the quarter and the group segment comprised roughly 36% of our total demand. This group room night volume represents a 33% 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 Q1 was a 152,000 room nights and was consistent with 2019 first quarter production. In terms of transient business, which accounted for roughly 55% of our total room nights in the quarter, comparable transient rates came in at $314 and were 14% higher than the pre-pandemic levels that we saw in the same quarter of 2019. The lingering impact of the Omicron variant in January and February led to lower levels of special corporate demand in the quarter, but we are seeing recent positive signs that should lead to acceleration into the remaining quarters of 2022 as companies increasingly return to the office and business travel becomes more widespread. As I mentioned earlier, leisure demand continues to be very robust and we again saw tremendous strength in average rates at our Oceanfront Resort Properties with both rate and RevPAR meaningfully higher than pre-pandemic levels. Based on the strength of demand in March, which accelerated into April, we are more encouraged about the outlook for 2022. Our preliminary April results reflect comparable portfolio occupancy of 76% at an average rate of nearly $300. This equates to a RevPAR for the month of $225, down just 3% from 2019. When we add in the two recent Wine Country acquisitions, our total portfolio ADR and RevPAR increased to $320 and $241 respectively. These are meaningfully improved results from where we were at the start of the year. We expect that continued healthy leisure demand during the spring and summer vacation seasons, increasing amounts of business travel, strong citywide calendars, and the return of corporate group functions will support sustained growth as the year progresses. Our recent booking trends are indicative of this, as our group room nights for the second quarter through the fourth quarter of 2022 are pacing at approximately 80% of pre-pandemic levels at an average rate that is 4% higher than 2019. This would imply that our overall group revenue pace for this time period is only down 18% from the same time in 2019. There is clear pent-up demand for corporate group events and we are seeing increased short-term booking activity. At Boston Park Plaza, we hosted a 500 room night corporate event last week that booked only three weeks in advance. And in Orlando, we saw a large corporate training event booking just a few weeks out. In San Francisco, which has been one of the most challenged markets, lead volume in April was back to pre-pandemic levels, and for the year, bookings were 13% higher than in 2019. Our portfolio's forward transient booking patterns are improving and are nearing pre-pandemic levels. While the strength of the recovery will not be uniform across all markets, we are seeing positive trends at each of our hotels. Based on what we see today, we expect our comparable portfolio's year-over-year percent growth in average daily rate for 2022 could be in the mid to high single digits, with group and urban hotels growing more than leisure hotels. We anticipate that demand levels for the comparable portfolio will rebound sharply starting with the second quarter, and that occupancy levels for the balance of the year could be down only 10% to 15% as compared to 2019. Moving to our transaction activity. We were quite active in the first quarter with the sale of three lower growth hotels in a challenged market for combined gross proceeds of $197 million. We redeployed $48 million of these proceeds into the accretive repurchase of our own shares at an average price of $11.16 per share, a meaningful discount to published estimates of NAV and at an implied 10.5 times multiple on our 2019 pro forma EBITDA. In addition, as you saw in our release yesterday, we recycled the remaining proceeds into the purchase of The Confidante Miami Beach in an off-market transaction. We are excited about this value-add opportunity, which draws upon our significant in-house expertise and proven track record of creating value through successful renovations and repositionings. As noted in our release, we are under contract to acquire the 339-room resort, which sits on 1.5 acres of well-located, fee-simple, oceanfront real estate for a purchase price of $232 million or $684,000 per key. We also expect to invest approximately $60 million to complete a full renovation of the hotel and reposition it as a premier beachfront resort under Hyatt's luxury lifestyle brand Andaz. The renovation work is expected to begin in phases starting in the fourth quarter of this year, with the completion currently expected to occur in the first half of 2024 when the resort will debut as the Andaz Miami Beach. 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 approximately $900,000 per key in a market where per-key valuations for similar assets are well in excess of $1 million. The addition of this hotel will bring better balance to our portfolio composition, more prudently utilize our balance sheet capacity, and enhance our long-term growth profile upon completion of the repositioning. This is a playbook we know well, and we have had great success in the past, and our team is eager to get to work when the deal closes next month. The hotel will remain in operation while the renovation works are completed, and we expect that continued growth across the remainder of our portfolio will offset any displacement in 2023, with the Andaz Miami Beach then contributing to outsized earnings growth starting in 2024. To sum things up, as we move into the second quarter of 2022, we are encouraged by the recent trends we are seeing across our portfolio in March and April. We believe we have reached a significant inflection point in our business, and barring any additional unforeseen circumstances, we are excited about the portfolio's growth trajectory going forward. We expect that our well-located urban and group-oriented assets will see outsized growth in the coming quarters as pent-up demand for business travel and corporate events begins to catch up with the already robust leisure demand at our resort properties. Additionally, Sunstone is in the enviable position to use our strong balance sheet and debt capacity to continue to grow the company and to create value for our shareholders. With that, I'll turn it over to Aaron. Aaron, please go ahead.

Aaron Reyes, CFO

As of the end of the first quarter, we had approximately $254 million in total cash and cash equivalents, which includes $39 million of restricted cash. We concluded the quarter with $576 million in total consolidated debt at a weighted average interest rate of 3.6%. We plan to fund the purchase of The Confidante Miami Beach using a mix of existing cash and proceeds from our currently undrawn revolving credit facility. After considering the hotel purchase, our pro forma leverage remains below the average of our peers, and we still have capacity for incremental debt-funded acquisitions to enhance per-share earnings and NAV in upcoming quarters. Regarding our financial results, detailed information is available in our earnings release and supplemental documents. The quarterly results exceeded our initial expectations and reflected lingering effects from the Omicron variant in the early part of the year, followed by a substantial demand increase in the latter part of the quarter. Adjusted EBITDAre for the first quarter was $27 million, and adjusted FFO was $0.08 per diluted share. As mentioned in our press release yesterday, starting with the first quarter of 2022, we are adjusting our presentation of adjusted FFO to exclude the non-cash depreciation expense related to our deferred stock compensation. This adjustment aims to align our reporting more closely with that of most of our peers and resulted in a $0.02 per share impact on our first quarter results. While we anticipate that the remaining quarters this year will be more profitable than the first, the current operating environment remains too uncertain for us to provide guidance at this time. Now moving to dividends, our Board has approved the routine distribution for our Series G, H, and I preferred securities. We can now open the call for questions. Operator, please proceed.

Operator, Operator

Our first question comes from Thomas Allen with Morgan Stanley. Your line is open.

Thomas Allen, Analyst

Thank you. Let me start with one question, and I may have a couple of parts. So focusing on The Confidante. First, are you going to continue operating the property during the renovation? And any thoughts on the performance during the renovation? And second, I remember when Hyatt bought it in 2016, there was a lot of optimism around the property. So can you kind of just talk about what the opportunity is now? Thank you.

Bryan Giglia, CEO

Good morning, Thomas. Let's begin with The Confidante and the opportunities we have. The property has performed well, but its current mid-beach location and the surrounding luxury assets limit its appeal to the luxury market. To enhance this, it requires capital and branding support. Drawing from our experience in Wailea, we understand that a well-executed Andaz can thrive in a strong market and effectively attract luxury customers. Our strategy involves investing capital into The Confidante, where our initial purchase price offers a 5% yield based on the 2022 cash flow, which we find appealing. With investment, we can transform it into a true luxury experience that competes with other high-end hotels. Currently, The Confidante is expected to operate at around a $280 rate this year, while luxury competitors are priced above $800. Historically, luxury rates were in the high $500s to $600s in 2019, and our goal is to reach about 60% of that. If we achieve a $500 rate by 2024-2025, it will signify a successful investment. Also, considering our initial investment and the capital needed, $900,000 per key for a luxury beachfront property in a high-end area with notable hotels like Faena is a strong long-term opportunity for us. Regarding cash flow over the next couple of years, we plan to operate the hotel with some renovations starting in the fourth quarter this year, though we don't anticipate much disruption. More significant renovations may begin towards the end of Q1 next year, allowing us to maximize the cash flow during the peak season. We expect EBITDA of $3 million to $4 million this year, and next year might see a $2 million dip because of the renovations, but we're taking a cautious approach based on previous experiences in Wailea. We forecast growth in 2024, reaching stabilization by 2025-2026, with an anticipated 8% to 9% cash-on-cash yield. The excitement around this opportunity among our team is quite high.

Thomas Allen, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of David Katz with Jefferies. Your line is open.

David Katz, Analyst

Hi, good morning everyone or afternoon, I should say, or morning where you are. Just looking at the balance sheet and thinking about the magnitude of the opportunity, how do you think about updated leverage tolerance or a target leverage range for where you'd like to be? And should we look at that as another turn or so, and therefore a few hundred million dollars or we take on a little bit of leverage with the things that we buy? Like where would you like to wind up as we roll out longer term?

Bryan Giglia, CEO

Good morning, David. Regarding the leverage, we consider it as a continuum throughout a cycle. We aim for leverage to be as high as four or five times during the early stages of the cycle, decreasing to around three times later on. Currently, looking at The Confidante and the leverage situation, which includes preferred stock, we are well below three times even when assuming a stabilized or ramping number for Confidante. This indicates we still have significant capacity, which will depend on the opportunities in front of us. There’s room for one or two turns, showing we have substantial capacity remaining on the balance sheet. Our portfolio provides us with a lot of optionality, and we've recently capitalized on that by taking advantage of our stock when it presents a compelling investment relative to NAV. We also have the ability to pursue acquisitions like The Confidante, even if there are some short-term challenges in reaching the final product. We believe our portfolio will enable us to achieve these goals as our group hotels continue to ramp up this year and next, helping to cover any displacement. The Napa and Sonoma hotels will also experience growth, contributing to our projections for next year, while The Confidante will add further growth in 2024 and beyond. We also have the flexibility to invest in our own properties, such as rebranding the Renaissance D.C. to the Westin D.C. and making other improvements, like the adult pool complex in Wailea. This flexibility allows us to be agile and utilize the balance sheet to enhance the company, boost earnings, and increase our value per share. To answer your question directly, yes, we definitely have capacity remaining, and we expect to continue applying a balanced approach in deploying it.

Operator, Operator

Your next question comes from Michael Bellisario with Baird. Your line is open.

Michael Bellisario, Analyst

Thanks. Good morning, everyone.

Bryan Giglia, CEO

Good morning.

Michael Bellisario, Analyst

Bryan, I just sort of want to go back to Miami, but compared to the deals you did last year in Wine Country. You underwrote those to 6% to 7% NOI yield. This Miami deal is 8% to 9%. So I guess kind of a two-parter. How much of the differential is that fundamentals are better today than what you underwrote call it a year ago? And then how much extra return, are you embedding in your underwriting for the renovation risk that you're taking in Miami versus the sensible ramp-up risk in Wine Country?

Bryan Giglia, CEO

I don't see much change in our outlook. The leisure markets are performing well, and Miami is also showing positive results. The Confidante is improving this year and gaining more market share. However, this hasn't altered our perspective on the Wine Country assets or this property. Our expectations for the coming years remain stable. We initially anticipated ongoing growth and improvement. Determining the appropriate additional return to compensate for investment risk is more challenging, as it could vary anywhere from 50 to 100 basis points or more if there's added risk. When evaluating The Confidante, considering its positioning and physical characteristics, we see a strong opportunity for transformation. As we experienced in Wailea, there is significant customer demand at price points that exceed our targets. Our task is to collaborate with Hyatt to ensure the product, service, and overall experience align with customer expectations. Drawing on our Wailea experience, we believe this location in Miami offers a similar potential, and we are confident in our ability to enhance this property and achieve the returns we anticipate.

Operator, Operator

Our next question comes from Anthony Powell with Barclays. Your line is open.

Anthony Powell, Analyst

Hi. Good morning. There's been a lot of talk, I guess, as earnings about leisure pricing and the sustainability of it. I'm just curious, what you're seeing for upcoming holidays at your resorts and what's your view on the ability to at least hold current rates for the rest of the year?

Bryan Giglia, CEO

Good morning, Anthony. In the leisure segment, we've observed significant price increases across all markets. Specifically, during peak holiday periods such as spring break, demand has been particularly strong both in leisure and urban markets. For instance, Boston experienced a high demand over spring break coinciding with the marathon. Looking ahead, we expect this trend to continue, but with a moderation in growth rates. In Wailea, a part of this is due to a shift in the customer mix, with group guests arriving at slightly lower rates compared to leisure travelers. However, these group guests contribute significantly to out-of-room spending, which will likely enhance EBITDA even if rates level off or dip slightly in some areas. Our performance in various leisure markets is influenced by both market conditions and our strategies. Regarding Wailea, it has developed into a premium leisure destination over the past decade, and the number of flights to this market has surpassed the levels seen in 2019. Notably, we are beginning to see an influx of Canadian travelers who make up about 8% to 9% of the market. As we integrate more group clientele, we can still achieve compression here. Oceans Edge has benefited from increased airlift and has performed well over the past few years. Our approach at the hotel has been to enhance offerings and experiences rather than just focus on occupancy, allowing us to lower occupancy rates while increasing room rates and competing effectively with other high-end resorts in Key West. The Wine Country assets are quite distinctive and will remain in high demand, allowing us to drive rates in those markets. These luxury properties tend to build occupancy more slowly, so maintaining our room rates is crucial. Our focus will be on building occupancy, attracting the right group clients, and optimizing these assets for profitability. The Confidante serves as another strong example of a market that has thrived. We are targeting average daily rates comparable to those achieved in 2019, which are significantly lower than current market rates. As we evaluate our leisure markets overall, it's essential to note that our acquisitions have led to a more balanced portfolio. While leisure might see a slight decline, we expect our business and group segments to grow throughout the year. Considering the impact of Omicron in January and February, the first quarter of next year will present a lighter comparison for those hotels. Therefore, we anticipate considerable growth in these properties over the next 18 months, which will support the overall portfolio.

Operator, Operator

Our next question comes from Chris Darling with Green Street. Your line is open.

Chris Darling, Analyst

Thanks. Good morning. I'm hoping you could give an update on the timing of the Renaissance DC rebrands to the Westin? I think you previously had said that might be complete this year, but it looks like it's a 2023 event now. And then given you have a couple of other Renaissances, just any thoughts around maybe similar conversion opportunities down the line?

Bryan Albert, Executive

Good morning, Chris. Indeed, it is morning for you. Regarding D.C., the completion was always planned for 2023. The meeting space has just been finished, although it was in progress last year and continues into this year. The guest rooms and lobby are now in the early stages, and these will be phased in. The meeting space is completed, which was always anticipated. Once the guest rooms are ready, we can start welcoming group customers next year, with a ramp-up beginning either at the end of this year or early next year. We are currently booking group business at a rate approximately 10% higher than what we were achieving as a Renaissance. We are already observing some positive effects. Additionally, considering the Westin brand from both business transient and leisure perspectives, we expect increased group rates along with significant occupancy and rate advantages once we transition to Westin. The Westin customer typically pays more than the Renaissance customer. Concerning our broader portfolio, part of our responsibility is to identify opportunities to enhance our real estate, whether through investing in the physical property or assessing brand affiliation to determine if a different brand would be a better fit. Sometimes a better choice may exist, but it might not be currently available. We collaborate with our brand partners to explore these options, similar to how we acquired The Confidante from Hyatt after discussions led us to decide that Andaz was the right brand for that asset. We employ this strategy with all our partners, for both new and existing properties across our portfolio. This approach is not exclusive to Renaissance; we seek improvement opportunities for all our hotels continuously.

Operator, Operator

Our next question comes from Bill Crow with Raymond James. Your line is open.

Bill Crow, Analyst

Good morning. Thanks, Bryan.

Bryan Giglia, CEO

Good morning, Bill.

Bill Crow, Analyst

This whole idea of kind of peak resort ADR was a big topic in the call earlier today. Miami spends poster child of COVID success, right? It kind of stood alone as the market that will benefit the most. But now we've got other markets opening up in the US and globally. And I'm just curious, what do you think the odds are that ADR in Miami in that market might be 20% lower in two years? I guess, maybe a return to kind of 2018 sort of levels. And maybe you could just tell us what the acquisition multiple and cap rate was if you used 2018 EBITDA instead of 2022 projected EBITDA?

Robert Springer, President and Chief Investment Officer

Sure. This asset has undergone several changes in ownership, branding, and positioning over the years. The earnings multiple for 2022 that we discussed is an improvement compared to its performance in 2018 and 2019, especially during that time of brand conversion. Regarding your question about the potential for a 20% decline in rates, we believe there has been a repricing in leisure and luxury markets. Consumers are valuing their leisure spending more than they did before COVID, as the pandemic prompted them to reevaluate their priorities. They are now more inclined to cherish these leisure experiences, which were previously limited. However, we recognize that certain markets have performed exceptionally well and there is a possibility of some downward pressure on rates. While we acknowledge this possibility, we don't anticipate it will be as significant as you suggested. We believe we have performed adequate underwriting for The Confidante and are optimistic about its future with our partner Hyatt. We see plenty of growth potential, even with some potential downward pressure in the high-end market, but we don't believe it will reach the extent you mentioned.

Bryan Giglia, CEO

And those, as Robert said, there is a lot of room between this hotel and the potential. I mean, keep in mind that this hotel and while it's a good rate, it's around a $280 rate this year still on the beach in Miami. There might be secondary or tertiary markets that have outperformed or leisure markets that have outperformed just because of the pent-up demand and the lack of other options. We feel that those markets will probably feel a little bit more than your top destination areas. And so Miami Beach, Napa, Wailea, Key West, those are markets that will they hit a bump in the road eventually? Absolutely. We all know this industry and that always happens. But even at a 20% decline, you're talking about a $600, $700 rate in this market for the luxury set. Again, we need to get significantly lower than that. So, there's always risk in all of these investments, but we feel that there is a lot of room for this hotel to accrete up.

Bill Crow, Analyst

Okay. If I could just follow up, I know we're trying to do one question, but maybe, Robert, you can tell me what the supply situation looks like in Miami over the next two years, so we can consider where you will be reopening this hotel.

Bryan Giglia, CEO

Yeah, there's absolutely projects in the market that are on the way that are on the radar screen in various stages. There's been actually a number of projects between South Beach and up that are a variation on what we're trying to do with The Confidante, take an older hotel and reposition it. So the Raleigh is a good example. That's a project that never reopened from Hurricane Irma back in 2017. And it's being repositioned into a Rosewood and a few others. So absolutely some new supply that we're cognizant of. But feel good that the market is in a position to absorb the new projects that are planning.

Operator, Operator

Our next question comes from Smedes Rose with Citi. Your line is open.

Michael Bilerman, Analyst

Hey, it's Michael Bilerman here for Smedes. Doug, I was wondering if you could maybe just spend some time now that the CEO process is done. Just taking us inside a little bit through the whole process in terms of – I can remember when the Board terminated John, one of the big things that you talked about was having someone with a CEO experience that I think you had said at one point on one of our calls you don't have to babysit a new CEO. And Bryan, nothing against you at all. But just with that background maybe Doug help us understand the decision to go with Bryan, promote the CFO, which is effectively what the company did with Ken and with John and now with Bryan before. Just help us tie all that together and then tie it to strategic alternatives and just making a decision to stay internal versus getting someone from the outside which appeared to be what you originally wanted to do?

Doug Pasquale, Executive Chairman

Okay. Good question. Let me try and address that as directly as I can. I think what I really said, Michael, was that we were looking for more transactional-related experience more so than prior CEO experience, although frankly that would not have been a negative attribute. So the Search Committee took about six months to go through things and they spoke with an extensive list of candidates, primarily external candidates obviously, some of which are names that would be very well recognized in the industry and that you would be familiar with that had prior CEO experience. And as we had the chance to – I specifically had the chance to be inside of Sunstone, I came to the determination that what the team offered was really very substantial experience for the kinds of things that we were looking for. Specifically, a willingness to recycle assets not at a time when we thought the future of that asset was not as bright. Even if it was a terrific asset as, a new investment that we could better deploy capital and create value. That we had a tremendous amount of transaction-related experience between Bryan and Robert and strong teams that both of them had built around them. And that frankly, that determination we made was our best choice. And we think by a substantial margin it was the best choice. And I don't think we could have canvassed the available candidates better than we did. We used a large national search firm. There were two-three dozen external candidates again people with experience. And we just believe that the experience level and attribute set available to us with right here in front of us and that there was significant transaction experience. And that if we really just charged ahead with the strategy which we have never wavered on, is it would be the right choice. And so that's what we did.

Operator, Operator

Our next question comes from Floris Van Dijkum with Compass Point. Your line is open.

Floris Van Dijkum, Analyst

Hi. Thank you for taking my question. Could you explain the typical group exposure in your resort assets and how it compares to your urban hotels? You've mentioned before that there has been a significant underperformance on the group side, which is now recovering. Please discuss this and the potential upside in your current portfolio, comparing the resorts to your urban hotels.

Bryan Giglia, CEO

The overall balance of the portfolio consists of about 25% business transient, 31% leisure, and 38% group, with the remainder being contract. In our resorts, the distribution is approximately 80% leisure and 20% group. Some of the group bookings also include a leisure component, as these higher-end groups prefer to stay in leisure destinations. The largest opportunities for growth in the upcoming quarters are in our major group markets such as San Francisco, San Diego, Orlando, and Boston. While resorts are currently operating at occupancy rates in the mid-70s to 80%, our urban hotels and large group locations had around 50% occupancy in the first quarter, which we expect will rise to the 70s and beyond in subsequent quarters. Wailea is also beginning to attract group customers, allowing us to build a solid base of business that enhances our leisure guest experience there.

Operator, Operator

We have run out of time, on today's call for Q&A. I'll turn the call back over to Bryan Giglia for closing remarks.

Bryan Giglia, CEO

Thank you, everyone, for joining us today. We appreciate the interest in the company and look forward to meeting with you at upcoming meetings and conferences over the coming months. Thank you.

Operator, Operator

This concludes today's conference call. You may now disconnect.