Earnings Call Transcript - SHO Q3 2021

Operator, Operator

Good morning, ladies and gentlemen, thank you for standing by. And welcome to the Sunstone Hotel Investors Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, November 5, 2021, at 12:00 PM Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Senior Vice President and Treasurer. Please go ahead, sir.

Aaron Reyes, SVP and Treasurer

Thank you, operator, and good morning, everyone. By now, you should have all received a copy of our third 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 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. With us on the call today are Doug Pasquale, Chairman and Interim Chief Executive Officer; Bryan Giglia, Chief Financial Officer; Robert Springer, Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer. On today’s call, Doug will discuss recent value-enhancing hotel transactions and provide his thoughts on the company’s near-term priorities and objectives. Bryan will then discuss the operating environment and recent trends in our business. And finally, I’ll provide a summary of our current liquidity position and a recap of our prior quarter financial results. After our remarks, we will be available to answer your questions. With that, I would like to turn the call over to Doug. Please go ahead.

Doug Pasquale, Chairman and Interim CEO

Thank you, Aaron. Hello, everyone. And thank you for joining our call today. As many of you know, I've been affiliated with Sunstone for quite some time now, having joined the Board in 2011 and taking on the role of Chairman in 2015. During my tenure, I have facilitated the management team's efforts as they repaired the company's balance sheet and upgraded its portfolio following the global financial crisis. And most recently, as we navigated the unprecedented challenges brought on by the pandemic. Now as Interim CEO, I've had the opportunity to become increasingly involved in the day-to-day operations of the company. With that enhanced perspective, I'm more confident than ever that Sunstone has the portfolio, the balance sheet, and the management team to deliver incremental value to its shareholders and do so on a more accelerated basis. As a first step in this process, we announced a series of hotel transactions yesterday that reflect our renewed commitment to value creation through the sale of assets which are no longer consistent with our strategy. The selected disposition of core assets when pricing is compelling, and through the acquisition of long-term relevant real estate. Going forward, you should expect that Sunstone will do more of the same as we further position the company for growth by actively recycling capital, and more effectively utilizing leverage and our tax attributes, while still maintaining a solid balance sheet with capacity and flexibility. Overall, I am very pleased with the progress we have made in the first two months of my tenure, and I look forward to continuing to work with the management team to unlock further value for shareholders. Before I turn the call over to Bryan, I want to provide an update on the CEO search process being conducted by the Board of Directors. When I assumed the Interim CEO role, I made it clear that my tenure in this position would be for a year or less and that the board was committed to identifying a permanent CEO who would further advance our existing strategy. The search committee was established in tandem with my appointment and the search process is underway. While we intend to conduct an efficient search, we will be thoughtful and farsighted. We will not rush the process and we will do everything possible to ensure the right new leader is selected. We expect to have an update as part of our next quarterly call. And with that, I will turn the call over to Bryan to cover some of the details of our third quarter operations, which came in stronger than anticipated, and to share some encouraging recent trends we are seeing across our portfolio. They give us reasons to be more optimistic as we head into the final months of the year and into 2022.

Bryan Giglia, Chief Financial Officer

Thank you, Doug. And good morning, everyone. I'll start with a review of the third quarter operating results, which as Doug just mentioned, materially exceeded our expectations with EBITDA more than doubling the prior quarter, and marking the return to positive quarterly FFO for the first time since 2019. I will provide an update on the current operating environment and forward booking trends, which point to continued growth in the fourth quarter and into 2022 despite the effects of the Delta variant. Last, I will provide some additional details on the exciting and value-enhancing hotel transactions that were announced yesterday. So let's begin with the third quarter operations, which came in stronger on both the top and bottom lines. Total revenue was $167 million, an increase of 43% from the second quarter, driven by a nearly 10 point sequential increase in occupancy and an average rate for the comparable portfolio that not only grew 13% from the second quarter of 2021, but was also just above the third quarter of 2019. These strong results were primarily the result of strong leisure demand over the summer vacation season that peaked in July, and then moderated in August and September, partly as a result of typical seasonal patterns, but also due to a short-term pause in travel demand due to the spread of the Delta variant. While occupancy increased to nearly 55% and benefited from growth in all segments, transient demand remained the standout with room nights increasing 27% compared to the second quarter. Our total portfolio third quarter average daily rate was $30 higher than the second quarter. And even when excluding Montage Healdsburg, which ran a very robust average daily rate of nearly $1,250, our comparable portfolio ADR of just over $248 in the third quarter came in higher than 2019 levels. A strong desire for leisure travel and a healthy U.S. consumer contributed to strong demand in certain markets and allowed our operators to push rates far beyond pre-pandemic levels. We achieved meaningful rate growth in Key West, Orlando, New Orleans, and Wailea. In fact, Oceans Edge saw rates increase an astonishing 103% compared to 2019 and Wailea Beach Resort bested their pre-pandemic rate by 40%. In addition to a stronger rate performance, out-of-room spend also increased with food and beverage revenues higher by 79% in the third quarter compared to the second quarter representing a 47% increase in food and beverage spend per occupied room. Other hotel revenues also increased as higher occupancy drove increased destination fees, spa, and parking revenues. Banquet and catering contribution per occupied group room increased over the second quarter by $96 and achieved approximately 70% of 2019 levels. Combined with stronger ADR, the growth in non-rooms revenue generated a quarterly comparable RevPAR of $207, a 41% increase from $146 achieved in the second quarter. Turning to costs, we have been focused on working with our operators to deliver a safe and enjoyable guest experience while looking for ways to achieve efficiencies and permanent expense reductions. Year-to-date, we have eliminated nearly $11 million of costs from our hotels, which we believe will be lasting savings and could be sustained even as business levels and occupancies increase. We recognize that there's a need to balance appropriate service levels and amenities with pricing and profitability. And there will not be a one size fits all approach to margin enhancement in every hotel. And so we are continuing to work with our operators to identify creative ways to drive profitability across the portfolio. During the quarter, our comparable hotels generated hotel EBITDA margins of 24.3%. While this is below the low 30% range we maintained historically, delivering mid 20% margins at a portfolio-wide occupancy of just below 55% is a significant accomplishment and gives us confidence that we will be able to achieve higher stabilized margins once demand returns to a more normalized level. The combination of higher rates, stronger non-room revenue, permanent expense reductions, and other cost controls contributed to third-quarter EBITDA that exceeded expectations and represented a more than two-fold increase over the prior quarter. While strong demand for leisure travel seems to be well established at this point. In fact, Saturday of Labor Day weekend was our portfolio's highest demand night of the year with occupancy of 84% at an average rate of nearly $275. We are also seeing positive trends in both group and business transient demand that we expect will accelerate as we move forward. Let's take a look at each of these segments in a bit more detail starting with the group. While total group room nights for the quarter increased only marginally from the second quarter to 82,000 nights, what is more important to note is that the group activity we saw in the third quarter was increasingly comprised of more traditional corporate and association events as opposed to the rooms-only and event-driven group business that composed much of the demand in the first two quarters of the year. While we were certainly pleased to have that business at our hotels earlier in the year, the return of traditional and higher EBITDA producing corporate and association meetings and events is a very welcome sign that we are on a path to normalize levels of operations. Corporate group activity in the quarter grew nearly 30% and the association business was more than five times higher than the previous quarter and generated 24,000 room nights. The Renaissance Orlando, Hilton San Diego, and JW Marriott New Orleans had a substantial increase in association and corporate group business and the Wailea Beach Resort experienced a meaningful return of incentive business with 8,000 incentive room nights at a very attractive rate of nearly $600 compared to 6,700 room nights and a rate of $400 in the same quarter of 2019. The Delta variant impacted group business later in the quarter as our hotels experienced increased cancellations, a decrease in group lead volume, and decline in overall group production. The majority of the cancellations occurred in August, and coincided with a peak in case counts witnessed in late summer from the spread of the Delta variant and were skewed towards corporate group as opposed to association business. Approximately 9% of our third quarter group room nights were canceled, which were primarily for events in August and September, and approximately 16% of our fourth quarter group room nights were canceled, which were primarily for events in October. We believe these headwinds from the Delta variant are largely behind us as group demand and lead volume began to reaccelerate post Labor Day and have continued into the fourth quarter. In fact, we expect the fourth quarter production to be the strongest of the year. For our five large group hotels, which make up two-thirds of our fourth quarter group room nights, 77% of our forecasted group room nights have already been picked up. Moving on to transient which accounted for roughly 75% of our total room nights in the third quarter. Total transient rate for the third quarter came in at 285 compared to 261 in the second quarter, an increase of more than 9%. Even more encouraging was the increased contribution of business travel to the overall transient demand. The number of special corporate rooms increased 103% from the second quarter with rates higher by 20%. Several of our hotels including the Hyatt San Francisco, Boston Park Plaza, and Hyatt Chicago witnessed a meaningful acceleration in special corporate room nights during the quarter. While our third quarter business transient volume was only 50% of pre-pandemic levels, future transient booking pace continues to grow every week and we expect this to accelerate into 2022 as companies increasingly return to the office and business transient travel becomes more widespread. As I mentioned earlier, our operators have been able to aggressively push rates in response to very healthy leisure demand. We saw strength in leisure rates at hotels across the portfolio, including Key West, Orlando, New Orleans, Napa Sonoma, and Wailea. The ability to achieve premium pricing has been most evident in our resort properties with Montage Healdsburg achieving a rate of approximately $1,250 for the quarter, and Oceans Edge in Wailea Beach Resort seeing rate increases of 103% and 40% respectively compared to the third quarter of 2019. This level of rate growth should also translate into profitability that exceeds our underwriting at Montage, and that outpaces pre-pandemic levels at Oceans Edge and in Wailea. Given the substantial pricing increase our operators have implemented. We are closely monitoring guest feedback to ensure our satisfaction scores remain competitive and that we are balancing near-term profitability with each hotel's long-term positioning. Wailea continues to command a strong TripAdvisor rating despite a $185 higher rate than the third quarter of 2019. An impressive achievement especially given our luxury peers. As we move into the fourth quarter, we are encouraged by what we are seeing for October. Our preliminary results for the month show a reacceleration of demand with RevPAR of approximately $150 made up of occupancy of 57% and a 264 average daily rate. October RevPAR is second only to our peak month of July and is above August and September by nearly 10% and 14% respectively. Given the current trends, we expect a strong finish to the end of the year with November and December benefiting from increased levels of business transient and group demand and continued ability to drive strong leisure rates during the holiday season. Shifting to our capital projects, we invested $25 million into our portfolio in the third quarter, with a focus on enhancing the quality and future earnings potential of the portfolio. In July, we completed work on Boston Park Plaza’s newest meeting space, a 7,000 square foot indoor space that will give the hotel incremental capacity to host in-house group business and reduce its reliance on citywide events. At the Hilton San Diego Bayfront, we completed a total redesign of the food and beverage options, including the addition of a market concept that will provide a better guest experience at a higher profit margin. Additionally, in San Diego, we converted unused space into 6,800 square feet of new high-quality meeting space that looks out onto the San Diego Bay. During the quarter, we also continued to make progress on the transformation of the soon-to-be rebranded Westin Washington D.C. The ballroom and meeting space renovations will be completed by the end of the year and work on the guest rooms and lobby will occur in 2022. Once the meeting space is completed, the hotel will be able to host group business next year while the rooms renovation is completed. We are pleased with the reception the in-process conversion is receiving from meeting and event planners and look forward to the incremental growth the hotel will generate as it captures higher rates and incremental share under the Westin brand. Moving on to transaction activity. As Doug noted, yesterday we announced three transactions that enhance our portfolio quality, strengthen our balance sheet, and provide additional capacity for future growth and acquisitions. First, we completed the sale of the 348 room Renaissance Westchester for gross proceeds of approximately $19 million. This hotel was a non-core asset in a challenging market that lacks sufficient demand to support a Marriott reopening after operations were suspended at the onset of the pandemic. The net proceeds from the sale after the payment of termination fees and severance costs was approximately $11 million, and the disposition removes an asset that was expected to be a drag on cash flow and growth going forward. Next, we are under contract to sell the 340 room Embassy Suites La Jolla for $226.7 million or approximately $667,000 per key. This is a tremendous outcome, and it is a perfect example of the embedded value that can be generated from the ownership of long-term relevant real estate. In addition to being a high-quality Embassy Suites and a productive cash generator, the hotel sits on phenomenal real estate. We were able to capitalize on its highly desirable location and sell the hotel to a buyer that will be able to better optimize the entire parcel. We expect the sale to close during the fourth quarter. Net proceeds after the mortgage loan are expected to be approximately $165 million. Finally, we are excited to announce the acquisition of the Four Seasons Resort Napa Valley. This one-of-a-kind asset located on the famous Silverado Trail is a terrific example of long-term relevant real estate. We are acquiring the resort for a gross purchase price of $177.5 million, a meaningful discount to its development cost. In addition to the 85 room resort and its abundant event space and full suite of luxury amenities, the acquisition price also includes nearly four and a half acres of vineyards and the elusive winery along with the inventory of prior wine vintages. The investment in the Four Seasons Napa Valley is the perfect complement to our previous wine country acquisition, Montage Healdsburg, which we acquired in April and is already surpassing our expectations. Between the Four Seasons and the Montage, we will have approximately 10% of our asset value in one of the most supply-constrained, sought-after, and highest-rated leisure destinations in the country. We will own the two premier assets and establish a market-leading position in wine country, with ownership of approximately 24% of the luxury room inventory, and 32% of the luxury event space. The purchase of the Four Seasons Resort Napa Valley is consistent with our stated strategy of acquiring long-term relevant real estate in the early phases of a cyclical recovery, and its addition further elevates our overall quality and earnings potential of our portfolio. We expect Four Seasons to contribute meaningfully to our per-share future earnings as we deploy more of our balance sheet capacity and benefit from the strong demand for leisure travel. To sum things up, third quarter results exceeded expectations as a result of continued strong leisure demand, steady improvement in business transient travel, and an improving group mix. Although expectations for the fourth quarter have moderated due to group cancellations related to the Delta variant, we have seen demand reaccelerate in recent weeks, and based on forward booking information, we are optimistic that these trends will continue in the fourth quarter and into 2022. Additionally, our investments both internally and externally will provide additional growth as travel demand moves closer to pre-pandemic levels. Furthermore, we are in the enviable position to use our strong balance sheet and debt capacity to grow the company and create value for our shareholders. And with that, I'll turn the call over to Aaron. Aaron, please go ahead.

Aaron Reyes, SVP and Treasurer

Thank you, Bryan. As of the end of the third quarter, we had approximately $222 million of total cash and cash equivalents, including $42 million of restricted cash. In addition to cash on hand, we also maintain full availability on our $500 million revolving credit facility, which equates to over $700 million of total existing liquidity. We are slated to close on the acquisition of Four Seasons Resort Napa Valley in the fourth quarter and expect to fund the transaction through a combination of cash on hand and from borrowings under our credit facility. As Bryan mentioned earlier, net cash proceeds from the sale of Embassy Suites La Jolla are expected to be approximately $165 million after the buyer's assumption of the existing $57 million mortgage loan. We expect the sale to also be completed in the fourth quarter. Shifting to the third quarter financial results, the full details of which are provided in our earnings release and our supplemental. The quarterly results reflect an improving operating environment driven by continued strong leisure demand, an increasing amount of commercial transient volume, and improving mixed group business. Third quarter adjusted EBITDAre was $35 million and third quarter adjusted FFO was $0.10 per diluted share. These results surpassed our previous expectations and mark the return to positive quarterly FFO for the first time since the end of 2019. During the third quarter, we recognized $1.6 million of restoration expense and an impairment charge of $1 million as a result of damage incurred at our two hotels in New Orleans following Hurricane Ida. Hilton New Orleans, St. Charles sustained the bulk of the damage, and we are working with our insurers to identify and settle a property damage claim. But we expect that future losses from the restoration work at this hotel will be mitigated by the property's insurance deductible of approximately $3 million. Now turning to dividends, we have suspended our common dividend until we return to taxable income. Separately, our board has approved the quarterly distributions for each of our series G, H, and I preferred securities. And with that, we can now open the call to questions. So that we're 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

Thank you. One moment please for the first question. Your first question comes from Rich Hightower from Evercore. Your line is open.

Rich Hightower, Analyst

Hey, good morning out there, guys. So, I want to go to one of the comments Doug made in the prepared commentary, just in terms of accelerating the recycling of capital and using leverage and tax attributes maybe in a different way versus the prior CEO regime. Clearly anything that has been announced recently or it's closed recently or is pending would have been formulated under John Arabia. And so implicitly that means you've got more in the works there. So maybe just help us understand the mix of before and after, and then also addressing specifically some of those comments around leverage and tax attributes.

Doug Pasquale, Chairman and Interim CEO

So thank you for participating. So you're correct. Complicated, convoluted transactions, like the ones described, take time to accomplish. The real credit for that goes to the executives in the room here for carrying it over the finish line. It's been a long, arduous process. And you're also correct that we have a lot of things in the works now. And as we said from the very beginning of my tenure, we intend to utilize momentum and to continue this. So this is because more of a regular and predictable occurring process where you're seeing transactions from the company over the course of many quarters and years to come. So I really want to congratulate them for all their efforts to get these accomplished in a relatively short period of time. There was a lot of work to be done and most outcomes were not certain; there were a lot of questions and ambiguities and decisions that had to be made. So the intent now really is to continue this. We don't intend to be and will not be a one hit wonder. The team is already in the recording studio working on what we hopefully believe will be other hits. And we're intent on creating an album of things to come. So time will tell. But I'm highly confident that what you see is just an indicator of good things to come down the road.

Bryan Giglia, Chief Financial Officer

And then Rich when it comes to the comment on tax attributes. And I don't think that this really differs in view or a way that we're going to look at the tax attributes going forward. We did use NOLs throughout the last cycle. We think that that is a good way to retain capital and grow the company. It allowed us last cycle to deliver the balance sheet and agree to the shareholders' equity that way. Going forward. It will be somewhat fungible. But our net NOLs will allow us to shield gains, shield some taxable income, most likely a combination of both, and allow us to especially if there are asset sales. And when you look at an asset sale like La Jolla, which has a very large gain to it. That's one way that we can then preserve some of that value that we unlocked and then go reinvested and try to do it again to create value for the shareholders.

Operator, Operator

Thank you. And your next question comes from the line of Smedes Rose from Citi. Your line is open.

Michael Bilerman, Analyst

Hey, it's Michael Bilerman, here with Smedes. Good morning.

Doug Pasquale, Chairman and Interim CEO

Good morning.

Michael Bilerman, Analyst

Doug, I was wondering if you can just maybe elaborate a little bit on the decision to sort of terminate John and now run a search. And you talked a little bit about how you've been on the board for the last 10 years, obviously, the long-term history with this company. I think this will be CEO number six or seven over the last 15 years, so what are you looking for in the next CEO that the prior CEO wasn't delivering? And at the same time, you talked a little bit about the board, which also has gone through pretty dramatic change. Your two new members just joined this past May. I don't know how much they had an understanding of where the company was. And so just help understand some of the dynamics because it doesn't feel as though Sunstone was underperforming to the degree that we've seen some other CEOs being terminated in the business.

Doug Pasquale, Chairman and Interim CEO

Sure, let me try and address this as briefly as I can, because we've talked to many investors one-on-one, and I don't want to be too repetitive. But first of all…

Michael Bilerman, Analyst

Well, should be in the public domain, right? I think that the public at large, and the investment community need to understand that it's not every day that the CEO gets terminated.

Doug Pasquale, Chairman and Interim CEO

Sure. So first of all, John and I have a long and good history. We've known each other and have been friends for a long period of time. And I have a great amount of respect for him and appreciation for all the things he contributed to the company. John was, about seven years ago, going on seven years, John was, we thought a really great candidate to assume the role of CEO because of what the company's needs were at that time. Specifically, we were over-leveraged, we needed better corporate governance, and some leadership in that regard. And John had very strong beliefs about that, and did a really fine job of helping us on those two fronts. With the passage of time, as the company grew and evolved, it was the board's determination that, notwithstanding the fact that over certain periods of time, the company performed well, on a relative basis, that there was significantly more opportunity to create value. And in order to best accomplish that, it was the board's view that new attribute traits were important, including someone who had more of a real estate background and transaction background. And so that was the primary fundamentals on that decision. And it's really, I think, a fairly natural evolution of how companies should work. Companies are supposed to grow, they're supposed to evolve. And for most companies, that means that at different times in its history, it needs different leadership attributes. And so that was the determination that was made. You're right, we have added new Directors. But those were for reasons that were found and consistent with the times. We were working hard on creating diversity on our board. And we had some long tenure Directors, whose time was approaching where it was best for them to cycle off. They were terrific Directors. But again, we thought board refreshment was in order. And so that influenced decisions there. We strongly believe we're on the right track. We understand that the reasoning wasn't completely evident to people. As I have said, if it were evident to everybody what our thinking was and what the reasons were, it means that we acted reactively instead of proactively. It's true that John played an important role in the transactions that we announced. But again, as I said, nothing was assured, nothing was done, and a lot of work had to be completed to do that. And I'm confident that if John was in the room speaking, he would be passing the credit to the same gentleman now I am passing the credit to. So, I understand why there's questions. But the past is the past, in 60 days, a lot has been accomplished. And my track record, for those of you who have known me, is one, when we commit to get something done, we're going to get it done. And I believe, as I said, that a lot of things are in place now that will set the stage for many quarters to come. The search process is underway, and we're finalizing the attributes that we believe are necessary for our next CEO. We're well aware that there's been far too many CEOs in this company, that's among our top considerations as to identifying leadership that can provide stability and growth and better maximize shareholder value. So that's our commitment. That's our intent. And we're going to know if it's right or not as we go forward into the future and perform.

Operator, Operator

Thank you. And your next question comes from the line of Patrick Scholes from Truist Securities. Your line is open.

Patrick Scholes, Analyst

Sorry, I was on mute there. Good morning, good afternoon, everyone.

Doug Pasquale, Chairman and Interim CEO

Good afternoon, Patrick.

Patrick Scholes, Analyst

In addition to looking for a new CEO, is the company being marketed for sale as sometimes happens when there is a void in leadership?

Doug Pasquale, Chairman and Interim CEO

Sure, the board is completely focused on maximizing shareholder value and believes that the company has a clear path to achieve its goals. As I mentioned, we're actively conducting a search process now to find a new CEO to continue executing on our capital recycling and growth plans. And as you can see, from yesterday's announced transactions, we're executing on that strategy. I believe we're off to a great start. And as I've said, a couple of times already, we expect to continue to build on this momentum. So, we know our commitment to maximize shareholder value and that's what we're doing. And we believe we have a very good strategic plan. We have a great balance sheet. We have a great management team. And we have a very good portfolio that we have every intent on building and improving upon.

Operator, Operator

Thank you. And your next question comes from the line of Anthony Powell from Barclays. Your line is open.

Anthony Powell, Analyst

Hi, good morning out there. Just shifting gears a bit. Question on pricing, especially on leisure resorts. We've seen some extraordinary pricing here in your portfolio and elsewhere. And how do you underwrite pricing and ADR for things like for Four Seasons Napa over a long period of time? Are you assuming any kind of deceleration or backsliding as more travel options open in the next couple of years and just an overall opinion on the stickiness of resort pricing will be super helpful?

Doug Pasquale, Chairman and Interim CEO

Good morning, Anthony. When we consider our two latest acquisitions, Montage and the upcoming Four Seasons, we've observed significant rate growth over the past year, similar to other leisure destinations like Maui and Key West. Our outlook varies from property to property, but for the two Napa Valley locations, they are both new assets that are gradually increasing in occupancy over the coming years. While the rate growth may not be as substantial during this time—potentially even remaining flat while occupancy increases—we believe these new properties have good prospects for both rate and occupancy improvement. The stabilized rates we anticipate for both hotels will not dramatically exceed current levels and will likely stabilize over a few years. Currently, the rates are higher than our initial projections. Additionally, in a market like the U.S., Oceans Edge has seen a 100% rate increase, which aligns with our strategy to enhance the hotel's performance in comparison to the downtown offerings in Key West. We're focusing on leveraging aspects like room size, location, and amenities, while capitalizing on leisure demand and executing our long-term strategy.

Operator, Operator

Thank you. And your next question comes from the line of David Katz from Jefferies. Your line is open.

David Katz, Analyst

Hi, good morning, everyone. Thank you for taking my question. I wanted to discuss the balance sheet. Given the ongoing transition, I would like your thoughts on the idea that the balance sheet might be considered under-levered. How do you assess that perspective, and what strategies do you envision for moving forward to align it with your goals?

Bryan Giglia, Chief Financial Officer

Good morning, David. Our perspective on leverage remains unchanged. Given the high volatility of this asset class, we believe in maintaining a low levered balance sheet throughout all phases of the cycle. Historically, we have seen our leverage decrease towards the end of cycles relative to our targets, which served us well. Regarding being more active in recycling capital, we took a significant risk, betting that the cycle would improve. While we were recycling capital, we could have potentially acquired one or two properties that would have yielded long-term benefits. Moving forward, we have significant capacity on our balance sheet, and we do not intend to return to being one times levered. Instead, we aim to stay in the lower third of our peers concerning leverage. There may be moments, as we are experiencing now, when our activities will increase our leverage as we grow the balance sheet. On a normalized basis for 2022, our balance sheet could revert to about three times levered, which positions us well for deals like the Four Seasons and capital recycling. If we identify a deal that offers strong returns for our investors, we will utilize our balance sheet capacity alongside our ongoing capital recycling efforts throughout the cycle.

Operator, Operator

Thank you. And your next question comes from the line of Thomas Allen from Morgan Stanley. Your line is open.

Thomas Allen, Analyst

Hey, good morning. Can you just help us estimate what your leisure versus corporate mix is now pro forma for all the deals? And then here's how we think about the strategy going forward; where would you want it to go? Thank you.

Bryan Giglia, Chief Financial Officer

Good morning, Thomas. Just a moment. Currently, if we look at the quarter on a pro forma basis, we’re at about 28% leisure and 36% business transient, with the remainder being group and association. This setup has worked for us even during the pandemic because we prefer hotels that have a group component. Hotels that blend business transient with leisure, like residential hotels, have performed better than urban transient hotels that focus on group and business transient. Looking ahead, we believe urban hotels and group business transient hotels will experience stronger growth than leisure hotels next year. This segmentation is crucial for us, but overall, there's potential to increase our leisure component a bit more in the portfolio. The last two deals we announced feature hotels with strong leisure elements, and while those were leisure-focused, the next couple of deals may vary. Over time, we aim to increase that 28% leisure mix a little further.

Operator, Operator

Thank you. And your next question comes from the line of Michael Bellisario from Baird. Your line is open.

Michael Bellisario, Analyst

Thanks. Good morning, everyone. Doug, question for you. I don’t know if the company issued stock in June; it was just above $13 a share. I think the signaling done was that was around NAV. So my questions are do you agree that that price was plus or minus representative of NAV at the time? And then how has your view of the portfolio's NAV changed since then, especially relative to some of the transactions you've announced and completed thus far?

Doug Pasquale, Chairman and Interim CEO

Hey, Mike, I'll start with this. We frequently discuss all equity issuance and repurchase matters with the board. While we don't provide specific comments on net asset value, we did issue shares during that time, which indicates our perspective. Looking ahead, as we navigate the path and trajectory into next year, considering various metrics as our confidence grows that the portfolio will continue performing, we evaluate market comparisons and trading values. The sale of Embassy Suites notably added nearly $100 million in value to our NAV, which will certainly enhance it. Overall, the growth of the portfolio and current pricing suggest that, regardless of what the NAV was previously, recent events and general increases in value have likely raised it.

Bryan Giglia, Chief Financial Officer

I would just add that NAV is an important indicator and metric to consider and reference. However, in terms of capital raising or other aspects, I believe it is not the only factor. It serves as an input to the overall business of investing in real estate, which involves many considerations. While NAV is significant, it is certainly not the sole factor and is very dynamic, often fluctuating, particularly during inflection points or in response to various developments in the capital market.

Doug Pasquale, Chairman and Interim CEO

And looking at our past transactions over a longer period of time, whether it be share issuance or repurchase, I think we have a pretty solid track record demonstrating that we are very mindful of our shareholders' equity, and we do try to do a very good job of making sure that we are careful and issue or repurchase at appropriate levels.

Operator, Operator

Thank you. And your next question comes from the line of Chris Woronka from Deutsche Bank. Your line is open.

Chris Woronka, Analyst

Good morning, everyone. I would like to ask about the Four Seasons acquisition. I understand you have set a target for stabilizing yield. Could you provide more insight into how you are approaching the underwriting of room versus non-room revenue? I'm trying to understand the scale of this operation, given the relatively small number of rooms, and whether you see opportunities for additional ROI investments there. Thank you.

Bryan Giglia, Chief Financial Officer

Let's start with a recap of the asset. As we've mentioned with Montage and now with Four Seasons, developing assets in the valley takes considerable time. We are acquiring 22.5 acres right off the Silverado trail, which includes 4.5 acres of vineyards. The hotel features excellent amenities, including a working winery, allowing guests to experience the entire process from grape to glass, which is distinctive to this hotel compared to others in the area. We believe we are purchasing at an attractive valuation, particularly when considering the cost of recreating such an asset today. We project a 6% to 7% stabilized cash yield on the hotel, based on other transactions we are observing in the markets and expectations for limited service hotels. On a risk-adjusted basis, we find this to be a compelling investment and return, especially in comparison to current market conditions. With our ownership of the two hotels, we will control over 20% of the luxury room supply and around 30% of the meeting and event space supply. Additionally, this is the newest event space, specifically designed to accommodate corporate functions while integrating smoothly throughout the property. Given this, we are very enthusiastic about these transactions. I'll let Robert provide a breakdown of the other revenue sources, but as mentioned, it will include 85 rooms with a highly desirable food and beverage operation, a winery operation, a spa, and exceptional meeting facilities.

Chris Ostapovicz, Chief Operating Officer

Yes, that covers most of it. One aspect that wasn't mentioned is that there are also residential homes for sale that will have the option to join a rental program. This is becoming quite common in ultra-luxury developments nowadays. We are optimistic about the potential for these products to be part of the hotel rental situation. We believe there are customers specifically looking for this type of offering and are willing to pay for it. If you get a chance to see the property, it’s quite impressive. Simply listing the amenities doesn't fully capture their appeal. We believe these amenities will attract a broader audience than just hotel guests. Bryan mentioned features like the winery, restaurant, and spa. Additionally, introducing a leading ultra-luxury brand into one of the most sought-after luxury leisure markets in the U.S., which they haven’t previously tapped into, is likely to generate significant customer interest. The property includes ample meeting space, various venues, and an event barn, among other features.

Operator, Operator

Thank you. And your next question comes from the line of Stephen Grambling from Goldman Sachs. Your line is open.

Stephen Grambling, Analyst

Hi, thanks. I'm going to take one more bite at the apple here when you are talking about or thinking about acceleration of growth; where do you think Sunstone can have a differentiated view or differentiated approach in the current transaction market to create value? Thanks.

Bryan Giglia, Chief Financial Officer

Hey, Stephen. It really boils down to what unique perspective we have. There is a lot of capital available, and many peers and private equity firms are exploring various deals. Ultimately, what leads someone to be the most proactive in pursuing individual assets depends on where we’ve had past success, our core strengths, and our perspective on that asset. When we assess our successful ventures and the assets that have generated the most value, those are the ones where we might identify greater potential in an acquisition compared to others. We are certainly willing to engage in larger value-add opportunities; those have often been our most profitable transactions. However, they require time and investment, which is why we maintain a solid balance sheet. We aim to undertake significant turnarounds and explore markets where we believe we can enhance asset performance through effective management. For instance, when we purchased the Hyatt San Francisco, we initiated a renovation that, while somewhat standard, opened up opportunities for asset management that allowed us to improve rates and significantly increase food and beverage margins. This is how we draw on our past experiences to decide where we should focus our investments for the best returns for our shareholders.

Doug Pasquale, Chairman and Interim CEO

Let me add to that, as Bryan mentioned, my experience in the REIT sector and managing nationwide health properties has shown me that being actively involved in the market is essential. Investors trust us with their capital to invest in real estate, specifically hotel real estate. To do this effectively, you must continuously seek acquisition and disposition opportunities. You need to be objective about your assets, reassessing them annually and asking whether you'd purchase that hotel based on its future potential. The team is progressing towards this objective viewpoint, recognizing its value. It's important to accept market realities; while you can leverage relationships and pursue off-market deals, the market operates as it does, and your options are either to step back and wait for better conditions or to stay engaged and invest wisely. Sometimes this means acting aggressively, other times more conservatively, or choosing not to invest at all because it seems like the right decision at that moment. If you stay too far on the sidelines, good luck finding that perfect moment when capital markets and real estate conditions align. We know how to make smart choices that enhance asset value and identify promising opportunities in our portfolio, similar to the La Jolla transaction, which significantly unveiled untapped capital tied up in the hotel due to a misunderstanding of its land value. Opportunities abound; being actively engaged in the market and having a dedicated team focused on intelligent growth is key. Each year, we aim to enhance our portfolio, and I am confident we will achieve this.

Operator, Operator

Thank you. And your next question comes from the line of an unidentified analyst. Your line is open.

Unidentified Analyst, Analyst

Hey, guys, thanks for taking my call. Hey, good to talk to you guys again. Yes, I went through the proxy. And by my calculations, there was a $2.25 million signing bonus for Doug, a $5 million retention bonus, and obviously the $11 million in severance is just dead weight. So that's $20 million to $25 million, and the explanation that was given on a disorderly transition, I think is unsatisfactory, saying it's the right time to move on and creating a disorderly transition that costs shareholders $20 million, I think is very disrespectful to shareholders. I just wanted to give you guys another chance to kind of give shareholders something that makes a little bit more sense. For a lot of our money went out the door.

Doug Pasquale, Chairman and Interim CEO

A lot of the money…

Unidentified Analyst, Analyst

On this transition, and he was arguably the most well-liked CEO in the space, and all the good things you're talking about is set up.

Doug Pasquale, Chairman and Interim CEO

So, I don't disagree that John was very well liked; I am among his biggest fans, okay. And so let's start with that. And now I'm going to defer it. I wish John nothing but the best. I hope at some point in time we are able to rekindle our friendship. He's a very intelligent, and he's a good man; we made the decision that his skill set did not match what the needs of the company are. That cost money. That's how business works. That's how it was set up. You're going to be able to tell if we made a good decision or not based on what we do from here. And I'm telling you, and I think the actions suggest what was accomplished in the last 60 days; that we pushed a lot of things over the finish line, we found value in La Jolla that we weren't even sure existed. And there's more of these things to come. So I respect your opinion; I understand it, but it doesn't change my point of view. And I don't think it changed the board point of view. We know we've got a lot to prove. We know that there were costs incurred; we expect to get a good return on that investment.

Operator, Operator

All right, and we have reached the end of our Q&A session. I'll hand the call back to Mr. Bryan Giglia for closing remarks.

Bryan Giglia, Chief Financial Officer

Thank you, everyone for your time today and interest in supporting the company. We look forward to meeting with many of you in the upcoming conferences over the next several weeks. Thank you.

Operator, Operator

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.