Earnings Call Transcript
Sunstone Hotel Investors, Inc. (SHO)
Earnings Call Transcript - SHO Q4 2020
Operator, Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Fourth Quarter 2020 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, February 12, 2021 at 12:00 P.M. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Senior Vice President and Treasurer. Please go ahead, sir.
Aaron Reyes, Senior Vice President and Treasurer
Thank you, Kevin, and good morning, everyone. By now, you should have all received a copy of our fourth 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 John Arabia, President and Chief Executive Officer; Bryan Giglia, Chief Financial Officer; and Marc Hoffman, Chief Operating Officer. After our remarks, we will be available to answer your questions. With that, I would like to turn the call over to John. Please go ahead.
John Arabia, President and CEO
Thank you, Aaron. I can say without hesitation that I'm glad 2020 is behind us, and I firmly believe that better days lie ahead. It goes without saying that 2020 posed the most difficult challenges the hotel industry has ever faced, and we were forced to do things we never thought we would have to do. That said and rising to the occasion, we and others working together also accomplished things we never thought possible. Simply stated, we're not out of the woods yet, but we have recently witnessed evidence of recovery in demand including leisure, commercial, and group demand. We believe if these trends continue, that a gradual recovery has started, and we are likely to resume hotel profitability sometime late in the second quarter or early in the third quarter of this year. Today I'll provide a recap of 2020 including our accomplishments here at Sunstone, as well as our annual and quarterly operating results. I will then provide comments on recent operating and booking trends, followed by an update on our liquidity and an overview of our 2021 capital projects as we continue to focus on long-term growth. Bryan will later provide more details on our recent earnings, finance transactions, liquidity and dividends. So let's begin with a recap of last year. Despite the extremely challenging operating environment, we were able to navigate the pandemic and execute on several transactions that increased the quality of our portfolio, reduced our debt, and better positioned the company for long-term growth. During the year, we sold two hotels; the Renaissance Baltimore, and the Renaissance LAX, for combined gross proceeds of nearly $172 million. These two transactions bring the number of hotels sold in the past three years to a total of nine hotels for gross proceeds of approximately $575 million. In July, we sold the Renaissance Baltimore at a reasonable discount to pre-pandemic pricing, which we believe was a good outcome considering the asset is a lower quality, urban group-oriented hotel that was losing money and expected to lose money for some time. In December, we were fortunate to complete the sale of the Renaissance LAX at what we believe to be a pre-pandemic valuation. This was a fantastic execution and a direct result of our strong balance sheet and nimble investment team. We did not have to sell this hotel nor did we need the incremental liquidity, and because of this, we were able to hold the line and extract premium pricing equating to a 6.8% cap rate on 2019 actual earnings. Additionally, during the fourth quarter, we reached a resolution with the lender of the mortgage on the Hilton Time Square, resulting in an assignment in lieu. Given the operating challenges this hotel faced prior to the pandemic, which were only exacerbated by a proposed uneconomic ground rent reset and an increase in property taxes, we expected the hotel to generate sizeable cash losses for the foreseeable future. While we were hoping for another outcome, the assignment of our interest in this hotel mitigated what we believe to be a deteriorating situation, and all things considered was the best outcome in a terrible situation. The departure of these three hotels in 2020 further consolidates our portfolio into long-term relevant real estate and further reduces our ground lease exposure. It's worthwhile to note that the combined 2019 RevPAR and EBITDA per key of these three hotels in aggregate was approximately 19% lower and 54% lower respectively, than the remainder of our portfolio. Additionally, the dispositions leave us with only two ground lease assets in the portfolio, which we believe compares favorably against all publicly traded hotel REITs. Despite the limitations on the current environment, we continue to make selective capital investments in 2020 that we believe will result in long-term value creation. During the year, we invested $51 million into our hotel portfolio with the largest project being the complete repositioning and renovation of the Bidwell Portland, which turned out beautifully. As many of you know, we take a long-term view of our business and so despite the uncertainty facing the industry in 2020, we chose to accelerate several highly disruptive projects that were on hold, awaiting a quiet time to be completed. At our Renaissance Orlando, we completed the first phase of a refresh of the hotel large atrium lobby, including replacing nearly 50,000 square feet of flooring, which would have otherwise resulted in millions of dollars of displacement. The lobby looks amazing, and we're able to complete this investment without any displacement or guest impact. At our Wailea Beach Resort, we added 32 beautiful lanai decks, which have significantly increased the appeal and revenue potential of these oceanfront rooms. Also in Wailea, we remain on track to complete our solar project in this quarter, which will eliminate approximately 650,000 kilowatts annually of energy and reduce not only our carbon footprint, but also our energy bill by roughly $160,000 per year. Finally, at our D.C. Renaissance, we have completed the refresh of our production share and the meeting space escalator modernization, both of which would have resulted in meaningful group displacement during normal operating times. In summary, despite very challenging times, we had a productive year at Sunstone. Let's move on to 2020 operating results. Of our 17 hotels, 15 were in operation at the end of the year, which represents 92% of our rooms in the portfolio and nearly 98% of our comparable 2019 hotel EBITDA. For the full year, comparable portfolio revenues were $233 million, and RevPAR was just over $46, which represents declines of 76% and 77% respectively compared to 2019. To put this into perspective, roughly three quarters of our comparable revenues in the year were generated in the first quarter prior to the pandemic. Full-year comparable property level EBITDA was a loss of $64 million, which represents a decline of 120% relative to 2019 despite a previously thought unattainable 56% decline in same-store operating expenses. Three of our hotels; Wailea Beach Resort, Embassy Suites La Jolla, and Oceans Edge achieved positive EBITDA for the year. While these results were not what anybody could have predicted at the start of the year, we're thankful for the very difficult work our operators and asset managers did this year to aggressively manage costs while maintaining a safe environment for our guests and hotel associates. Moving on to the fourth quarter; comparable portfolio revenues were $32 million and RevPAR was $25.36, which represents a decline of 86% and 87% respectively, compared to the fourth quarter of last year. Our fourth quarter RevPAR was challenged by the seasonal slowdown in business and the increase in both COVID cases and stay-at-home restrictions, which had a temporary impact on transient reservations. Nevertheless, our portfolio RevPAR of just over $25 increased from the nearly $18 witnessed in the third quarter and the $3 in the second quarter as we opened up additional hotels and as occupancy at several hotels increased, particularly our higher-rated properties. Demand in the fourth quarter came from a combination of leisure transient, contract business and event-driven groups that were primarily related to either government or emergency management business. Fourth-quarter group business which was made up of non-congregating room blocks was generally limited to our hotels in San Diego and New Orleans. We have also recently seen a very small but growing number of commercial transient rooms, particularly in October and November, as the workforce started to return to traditional offices and get back out on the road. Furthermore, in December, we saw an increase in holiday travel at Oceans Edge, Wailea Beach Resort, Renaissance Orlando, and both of our hotels in San Diego. Leisure demand continues to be the primary source of business for many of our hotels. Our drive to hotels and resort destinations continue to outperform our city center hotels, particularly on the weekends, as people seek travel opportunities away from their homes. Our Oceans Edge resort in Key West ramped to 53% occupancy in the fourth quarter at a slightly higher rate compared to the fourth quarter of 2019, driven completely by transient leisure business. The spacious resort with six separate pools is an ideal destination for socially-distanced vacation. Over the New Year's holiday, Oceans Edge ran nearly 90% occupancy with an average rate that was competitive with that of the prior year. Similarly, our hotel in Wailea continues to rebound despite the flighty nature of Hawaiian Islands, which reopened for business in mid-October, albeit with significant testing requirements and limited open amenities. As expected, demand in Wailea has been building slowly with occupancy levels in the range of 19% to 23% per month. As Wailea's occupancy builds, we continue to maintain our premium pricing integrity and have been disciplined in our approach to revenue management, as opposed to lowering prices in hopes of creating demand. Our November ADR at the property was 13% higher than the previous year and our ADR from Christmas to New Year's was over $725. We continue to believe that our outstanding hotel product and desire by travelers to vacation in Maui will allow us to maintain our high rates while building occupancy as more people feel comfortable traveling. Now let's take a look at our quarterly group performance. Group business increased sequentially in the fourth quarter compared to the third quarter from 21,000 room nights to 32,000 room nights, or about 24% of the total room nights achieved in the quarter. Current group business continues to be composed primarily of government and emergency management-related groups, all of which tend to book with little lead time. That said, we have also started to see a few incidences of traditional groups keeping their meetings as planned. For example, while certain isolated events that showed up were small compared to historic events, a sports group kept a room block at the Renaissance Orlando in early January and two medical groups recently showed up at Wailea Beach Resort. During the fourth quarter, property level expenses declined by 70%, which includes the benefit of approximately $8.7 million of operational-level credits and adjustments, including several real estate tax adjustments and employee tax credits. Despite such material declining costs, the challenging demand environment resulted in property level adjusted EBITDA loss of $18 million in the fourth quarter. Now, a loss of $18 million is nothing to get excited about, but it does show continued improvement from the third quarter which had a loss of $32 million for the comparable portfolio. Similar to the third quarter, the fourth quarter property level loss was several million dollars better than we had anticipated, even after accounting for the credits we received. We continue to work with our operators not only to reduce expenses in the short term, but also to identify efficiencies and other improvements to our operating model that are expected to generate sustained cost savings for owners as demand returns to our hotels. So, let's dig into the forward-looking trends for both group and transient business starting with group. We believe 2021 group business will ultimately depend on the speed and efficacy of the vaccine distribution and the degree to which that allows us to return to normal. In the near term, cancellations in the first quarter of 2021 are trending in line with that of the fourth quarter of last year, and we would expect limited group room nights outside select government-related groups. Looking at the second quarter; our group cancellations have increased over the last 90 days, but at a much slower pace than what we saw in recent quarters. Several groups remain intent on holding their events in the second quarter, including a couple of association events in San Diego and a few small city-wides in Boston. This gives us some confidence that group room nights will begin to increase in the second quarter and as the distribution of the vaccine becomes more widespread and as travel restrictions and social distance requirements ease, group trends will accelerate in mid to late summer. Given the expected vaccination trajectory, meeting planners have become more confident about holding their events in the third and fourth quarter and we've witnessed minimal group cancellations for that time period. Based on these assumptions, we expect our portfolio will perform materially better in the second half of 2021 and specifically in the fourth quarter. The recent pace of future group bookings also points to recovery. Following the loosening of stay-at-home orders in the earlier part of this year, we saw a meaningful increase in bookings and group lead volume. In January, our portfolio group lead volume was up 130% over December and the total number of leads reached a level not seen since last March. From a production standpoint, Hilton San Diego Bayfront had its highest January group production in the last six years with over 17,000 room nights booked, and Boston Park Plaza booked several large pieces of business for the third and fourth quarter. In New Orleans, Jazz Fest, French Quarter Fest, and two other festivals were rescheduled for October and now every weekend in October has the potential for market compression, which is great and something we have not seen in quite some time. Looking further at group bookings since the beginning of the fourth quarter, we booked 140,000 new group room nights for all future months, excluding the rebooking of previously canceled groups. While a portion of these bookings relate to isolated-driven event business, the remaining balance still represents an acceleration from previous months and demonstrates pent-up demand to hold meetings when conditions permit. In addition to new bookings, to date, we have rebooked 266,000 group room nights that were previously canceled; approximately 25% of all canceled group room nights since the start of the pandemic. We would expect that number of rebooked rooms to increase as another 3% of canceled rooms are at various stages of reworking their contracts and an incremental 24% of canceled room nights have expressed an interest in rebooking and are working with our sales team to potentially secure new dates. Taken together, the new groups booked since the beginning of the fourth quarter and all rebooked groups and those in the contracting process represent approximately $100 million of group room revenue, and approximately $125 million of total group revenue. We are confident we would not have captured all of this business if we did not keep sales professionals on property to work with and take care of our meeting planners and group customers. While our 2021 group room night pace is down materially compared to pre-pandemic levels, we currently have approximately 290,000 group rooms on the books for 2021, representing $62 million of group room revenue and a significant increase from the depressed 2020 levels. In addition to the more optimistic outlook for group business, trends are also showing signs of improvement, particularly after the vaccine distribution began. Looking at the historical trajectory in mid-March 2020, net transient bookings quickly turned sharply negative, meaning reservation cancellations materially outpaced new reservations as travel came to a historic standstill. Weekly net transient reservations generally remained negative through the middle of July and then gradually increased through mid-October as more hotels opened. Around late October or early November, net transient reservations remained positive but decelerated as the weather turned cooler and COVID-19 cases spiked. That said, I'm pleased to report that net transient reservations have rapidly improved since the vaccine distribution began, and our weekly forward bookings while still short of normal levels are at the highest levels that they have been since the first week of March 2020. Following the onset of the pandemic, the booking window grew increasingly short, with most reservations being made within a few days of arrival. We are now starting to see a booking window extend. For example, Oceans Edge has seen a significant increase in transient bookings that span over a three-month period. Similarly, we are starting to pick up transient reservations as far out as the fourth quarter, particularly in places like Wailea. For the second half of the year, Wailea has 13% more transient rooms on the books compared to the same time in 2019 and the outlook has been improving weekly. While it is obvious that we still have a long way to go to get back to normal operating levels, the trend is clearly headed in the right direction, particularly as the majority of our portfolio opens and vaccine distribution continues to accelerate and show promise. Now let's talk a bit about our improving cash burn. On our last call, we provided an estimate of our monthly cash burn, assuming the majority of our portfolio was in operations, but would continue to run at very low occupancies. At that time, we established that we would incur property-level cash losses of approximately $10 million to $13 million a month, and when combined with our corporate expenses, debt service, and preferred dividends represented a total monthly cash burn of $16 million to $20 million before CapEx and extraordinary items. Our actual hotel level cash burn for the fourth quarter was approximately $9 million per month and when combined with our corporate cash requirements equated to a monthly burn rate of $16 million on average, which was at the low end of our estimated range. We continue to fine-tune our operating model at the prevailing occupancy levels and remain focused on minimizing operating expenses. We currently expect our first quarter monthly corporate cash burn rate before capital investment to range from approximately $14 million to $17 million per month, or a 14% decline from the previously provided range. Furthermore, if occupancy begins to increase, we would expect second-quarter cash burn to decrease significantly and anticipate that our portfolio could achieve monthly profitability late in the second quarter or early in the third quarter, and then our monthly corporate cash usage could achieve breakeven levels by the end of the third quarter. So, let's switch gears and talk a bit about our significant and enviable liquidity position. We ended the year with $368 million of unrestricted cash and full availability on our $500 million credit facility. Our year-end cash balance included the proceeds from the sale of the Renaissance LAX, as well as the repayment of the mortgage secured by the Renaissance DC, which was paid off just prior to year-end. Repayment of the DC loan eliminates roughly $10 million of annual debt service and will leave us with only three mortgages. As our cash burn rate continues to decline, we are increasingly confident that a notable portion of our existing unrestricted cash balance is available for investments that we believe are likely to become available in the next several quarters. That is, we're one of the few companies that is not dependent on credit facility draws or other borrowings to fund meaningful acquisitions. From a capital perspective, we plan to invest approximately $70 million to $80 million into our portfolio in 2021. Our largest projects this year will be the Renaissance Washington DC, where we have been working with Marriott on a plan to convert the hotel to the Western brand. As part of the conversion, nearly all areas of the hotel will be reinvented, including a full renovation of all 807 guest rooms and bathrooms, conversion of a majority of bathtubs to showers, the addition of nine new keys, upgrading the fitness center, the redesign of all public spaces, meeting areas and food and beverage outlets, as well as enhancements to the exterior facade. We believe that the Western brand will elevate the hotel's positioning, allow it to better compete for both group and transient customers and ultimately enhance long-term earnings potential and value of the hotel. The renovation work will begin later in 2021 and the rebranding will occur in 2022 once the repositioning is substantially complete. We anticipate that the total investment for the conversion will be approximately $70 million, with nearly $30 million of that spend occurring in the current year. This investment is roughly $30 million over the cost of a cyclical renovation, but one that we believe will generate a low to mid-teens return on incremental investment given the increased rate potential. We are excited about this project and look forward to working with Marriott on another successful repositioning. In addition to the conversion project in Washington DC, we have several other value-enhancing projects planned across the portfolio this year. At the Hilton San Diego Bay Front, we're renovating the ground floor by redesigning or reconcepting a restaurant and converting a formerly-leased restaurant space into meeting space. The new meeting space will enable us to sell more group rooms and allow for the combination of indoor and outdoor waterfront meeting space that sits adjacent to our event lawn. At our Boston Park Plaza, we are converting another former ground floor retail space into additional meeting and pre-function space. Similar to our successful Avenue 34 meeting space, we anticipate this will also be highly sought after for social catering events and will provide additional breakout space to attract large groups. Finally, we're adding a second adults serenity pool at our Wailea Beach Resort to better accommodate guests and to further enhance our overall resort experience. To sum things up, we believe that the worst is behind us and we are now in a period of transition. The vast majority of our portfolio is operating and we are seeing trends that give us increased optimism and confidence that we're on the path to return to profitability in the second half of 2021. And finally, our significant cash on hand before drawing down on our credit facility not only provides us with stability during these uncertain times, but will also allow us to fund attractive investments earlier than others who may be focused on shoring up liquidity. With that, I'll turn it over to Bryan. Bryan, please go ahead.
Bryan Giglia, Chief Financial Officer
Thank you, John, and good morning, everyone. As of the end of the quarter, we had approximately $460 million of total cash and cash equivalents, including $48 million of restricted cash and an undrawn $500 million revolving credit facility. During the quarter, we utilized proceeds from the sale of the Renaissance LAX along with cash on hand to repay the $108 million mortgage secured by the Renaissance Washington DC. The repayment of this loan removes our highest cost piece of secured debt and eliminates nearly $10 million of debt service per year, leaving us with only three secured mortgages remaining in the portfolio. During the quarter, we also executed amendments to our unsecured debt agreements, which provide for additional covenant relief and extend the financial covenant waiver period until the first quarter of 2022. We appreciate the ongoing support of our high-quality lending group throughout this process. Our balance sheet remains strong with significant liquidity and continues to position us not only to successfully navigate the current operating environment but also to allow us to take advantage of opportunities as they may arise as the industry recovers. We continue to focus on managing our costs and minimizing hotel expenses while maintaining our properties in good condition and opportunistically investing in projects that would have resulted in material displacement. Working with our operators, we have reduced operating expenses by approximately 60% to 70% since the start of the pandemic. Our current projected cash burn rate is now $14 million to $17 million per month before capital expenditures, which is reduced from our previous range of $16 million to $20 million per month and down from the actual fourth quarter burn of approximately $16 million. Shifting to fourth quarter financial results, the full details of which are provided in our earnings release and our supplemental. While fourth-quarter performance was significantly better than the third quarter, operations continue to reflect the most dramatic decline in hotel demand the industry has ever seen. Fourth quarter adjusted EBITDA was a loss of $19 million and fourth quarter adjusted FFO per diluted share was a loss of $0.16. While we were anticipating the fourth-quarter results would show sequential improvement, the actual results also benefited from approximately $8.7 million of operational level credits and adjustments, some of which may not repeat in the first quarter of 2021. While we are not providing guidance at this time, let me provide a basic framework on how we are thinking about 2021. As we've noted, we expect our near term monthly corporate cash burn to be between $14 million and $17 million before CapEx. That is our assumption for the first quarter, which is marginally better but generally in line with the fourth quarter of last year. As the year progresses, we anticipate that the monthly cash burn will decline meaningfully, and we expect to reach hotel profitability by the end of the second quarter or early third quarter. The rate of acceleration will depend on the success of vaccine distribution, the continued easing of state and local restrictions, and the return of group travel. As John indicated, we are seeing multiple signs of demand acceleration, especially in the back half of the year. Turning to dividends, we have suspended our common dividend until we return to taxable income, which may or may not occur in 2021. Separately, our Board has approved the routine quarterly distributions for both of our outstanding series of preferred securities. And with that, we can now open the call to questions. Kevin, please go ahead.
Michael Bellisario, Analyst
Good morning, everyone.
John Arabia, President and CEO
Hey, Michael.
Michael Bellisario, Analyst
John, first one for you. Just maybe on the prospects for external growth. Could you maybe frame how you're thinking about what an accretive transaction or the metrics of a potentially accretive transaction would look like?
John Arabia, President and CEO
Really no change from before. Underwriting based on what we think the long-term earnings potential of the asset are discounted based on overall risk that we see for the asset. We are clearly targeting long-term relevant real estate. Some of those hotels, the discounts on those types of hotels, I think have been smaller than what we see for more commodity assets that have garnered larger discounts to pre-pandemic pricing. Michael, I'd say it's similar to how we underwrite assets in the past, albeit with a much different starting point now.
Michael Bellisario, Analyst
Thank you, and then I do have one more follow-up on a different topic. Thanks for that though. The Hyatt Regency in San Francisco, not your property, but there was a new conversion announced in December. It's a lot of new hire rooms coming into the market. Did you have a say in that deal getting done at all and maybe more broadly, how were you thinking about brand conversions that might occur in other markets that might impact your portfolio both from a value perspective and a performance ramp-up perspective?
John Arabia, President and CEO
No, we did not have a say specifically in that conversion. I feel a lot better about the fact that those rooms already exist in the market and are already a competitor to the hotel. And so to me, it's much better than if a significant hotel had been built and added to the comp set, particularly under the same brand family. So, I'm not all that concerned about it, quite honestly. But no, we did not have a specific say in that new addition.
Michael Bellisario, Analyst
And are you seeing anything else similar to that in terms of conversions, big conversions in any other markets? Or do you kind of see this as more of a one-off opportunity in that market?
John Arabia, President and CEO
That's a question better suited for our operating partners. I can speak to the conversions within our own portfolio, and I believe we have some very exciting news. The location of our Renaissance DC asset has significantly improved over the past decade. It has really become the center of D.C., especially with the addition of City Center, Anthem Road, and the flagship Apple Store at the Carnegie Library, which is literally right outside our door and close to the Convention Center. Together with Marriott, we have developed an excellent repositioning plan to elevate that asset and make it a flagship property for the Convention Center and commercial transit. We believe we can achieve a rate premium already present in the market once we deliver a product that competes directly with those assets, along with a brand that will suit the property well when we are finished. We are genuinely excited about the rebranding and conversion prospects.
Michael Bellisario, Analyst
Perfect, thanks for all that.
Lukas Hartwich, Analyst
Thanks. The Western conversion in DC is quite intriguing. That asset has already performed well in the market. I'm curious about the aspirational goals for metrics like REVPAR index and others.
John Arabia, President and CEO
Yes, we believe we can sell that asset for around $20 in ADR, possibly even more. We are confident we can compete effectively with the two main competitors that operate excellent hotels in that area. We see ourselves going head-to-head with them. Given the location, which we prioritize, we can adjust our property offerings over time to fit those locations. This is something we have observed improving over the last decade; our locations continually get better. We have been working on this for quite some time, and we are enthusiastic about it. Yes, we believe we can narrow the gap with some of those competitors.
Lukas Hartwich, Analyst
Great. And then my other question is just on the transaction market. Obviously, you're underwriting hotels and I'm just curious how the tone has changed post the vaccine news in November. My gut would be that whatever the discounts were pre that news, were larger than what they are today. But obviously, we haven't seen many transactions close post that news. So just curious kind of the tone of the conversations you're having.
John Arabia, President and CEO
I think that's a fair assumption, Lukas. A lot has changed in people's psyche since the vaccine news was so positive. We've seen it in the stock market, we've seen it in the financing market. 90 days ago, I couldn't tell you that there was an active CMBS market for hotels, for example and we have clearly seen a bit of a thawing. I wouldn't say it's a healthy level yet, but a bit of a thawing CMBS market where various banks are actually quoting CMBS for select service portfolios, or maybe certain specific assets, particularly those that have higher levels of occupancy. I wouldn't say it's available for all hotels; but all of those things, I believe, as your question suggests, I believe that the ask on assets and the bid on assets is up from where it was 90 days ago.
Lukas Hartwich, Analyst
Appreciate it. Thank you.
David Katz, Analyst
Good morning, everyone. It's great to hear from you all. I wanted to revisit the topic of group business, which we've discussed quite a bit. This is an important consideration when we evaluate bookings, as we anticipate a significant amount of pent-up demand. However, the constraints and flexibility related to these bookings lead us to question their authenticity. Assuming these bookings can happen, will they actually occur? Can you provide any additional insights on this?
John Arabia, President and CEO
Sure. It's still a fluid situation, but instead of meeting planners focusing on current restrictions, our discussions with operators and planners have been about where those restrictions might be in 3, 6, 9, or 12 months. There is growing confidence that by late summer, certain groups will be allowed to meet, and by the end of the year, that number will be even higher. This situation remains dynamic; changes could happen sooner or later depending on the vaccine rollout, its effectiveness, and people's comfort levels. However, there is a strong desire to meet and travel. Evidence of this is shown by the increased reservations we have for Wailea in December compared to last year, and the fact that groups are actively seeking spaces for their meetings. The desire and ability to meet are present; we just need to ensure that the vaccine rollout goes smoothly.
David Katz, Analyst
I wanted to ask what information or insights we have regarding business travel, specifically about our ability and willingness to travel. How are you considering business travel as we move forward?
John Arabia, President and CEO
So we started to see a little bit of a trickle of business transient travel or BT accounts in the fourth quarter. And it was small numbers, but it was actually fairly widespread across the portfolio. So business transient travel for our portfolio on a typical time period probably makes 35% of our total business. In the fourth quarter, it only made up about 3% to 4% coming through those BT channels, but that was better than we saw before. And again, it was widespread; so we are seeing pharma, universities, defense contractors, some project business that has some hospital business that has started to show up. I would not say that we've seen significant business from my understanding, from what I say, financial yet as a lot of those folks still are not back in the office nor traveling. But some of the other businesses, we've actually seen little trickles of business and we're seeing more and more BT reservations starting to come in. Again, it's lagging leisure; it's lagging group activity, but we're starting to see that business transient, those BT accounts starting to produce a little bit more, particularly after the vaccine rollout began.
David Katz, Analyst
Thank you. Appreciate it.
Danny Asad, Analyst
Good morning, everyone. John, I want to begin by mentioning that this is likely the most positive outlook we've heard from you in several years. Could you provide us with more details about the types of groups that are confirming these events? I know you touched on this in response to David's question, but could you give us more specifics? Are you noticing group activity in particular markets like San Diego, or is it more widespread?
John Arabia, President and CEO
It's a bit more widespread in our discussions with various groups. As I mentioned earlier, we had some excellent group bookings in San Diego in January. In the third quarter, I expect we'll see an increase in local associations and a few city-wide events that may emerge, although there's still some uncertainty. There is also some corporate group activity, so overall, I would say the situation is fairly widespread.
Danny Asad, Analyst
For the leisure segment, do you have any insights on the acceleration in leisure demand and how much of that is influenced by Hawaii? It sounds like you are optimistic about it, so I'm curious about how the portfolio performs without considering Hawaii.
John Arabia, President and CEO
Yes, good question. Wailea and Oceans Edge are skewing those numbers, even though we're getting increased transient business even in some hotels like Hilton Bayfront, that traditionally aren't leisure hotels. I think the desire for people to get out of their homes, and do something more similar to normal. I know, for example, in San Diego, SeaWorld is just reopening and things like that that people want to get out, even if it's a close drive from their home. But you're right, Danny, that is skewing those numbers a bit are Wailea and Oceans Edge. I will tell you that as soon as the vaccines came out, and it looked like the restrictions in Hawaii would continue to ease, our phone has been ringing off the hook in Wailea. In fact, my message to all of you now, if you plan on going on spring break, summer break, or festive season, start looking to make your reservations now because I honestly believe great hotels are going to fill up, and there's not going to be rate sensitivity. So…
Danny Asad, Analyst
Thank you so much. That's it for me.
Rich Hightower, Analyst
Hey, morning, guys. John, I kind of want to follow-up a little bit on the last question in terms of skewness within the portfolio. And thinking about that sort of overall profitability hurdle that you've talked about, late 2Q, early 3Q. How many hotels in the portfolio does that apply to? And how do you see sort of skew then, 17-hotel portfolio in that sense?
John Arabia, President and CEO
So, Rich, you're talking about how many of our hotels do we think could be profitable within the portfolio by the second or third quarter, is that…
Rich Hightower, Analyst
Yes, that's a simpler way to ask what I asked. Yes, thanks.
John Arabia, President and CEO
I don't know if I have that in front of me. It's going to be a mix; there will clearly be some of the city center hotels that I would say would be behind that. I would expect some of the hotels that are already profitable or approaching profitability will be into profitability. I don't have a number in front of you Rich, just hotel by hotel; but there will still be some hotels that are losing money by the second and third quarter I'd suspect.
Bryan Giglia, Chief Financial Officer
Yes, the larger group hotels that are safest will likely become profitable later than the leisure or smaller city center hotels. Our expectation is that the Wailea's and other hotels which were either profitable in the fourth quarter or very close to it, like the New Orleans and Key West assets, will lead the way. The larger group hotels are expected to follow later as we progress into the fourth quarter.
Rich Hightower, Analyst
Okay, so that's what I thought. That's a helpful explanation, though. And I guess in a similar way, when we think about the sort of highly rated business assets like Wailea, like Oceans Edge; right; a lot of that sort of sinks to the mix at the hotel and perhaps limited inventory in the market at times or maybe it's just the neighborhood that it's in, right; thinking of Wailea in that context. But as we sort of see a broader reopening in urban markets in Big Box Group assets, I mean, how do you expect that sort of rate integrity equation to play out as you're then sort of competing with other owners whose balance sheets are differently structured, maybe a little more distressed than what Sunstone has? How do you expect the pricing dynamic to play out? And does that factor into the assumptions that you make around your own portfolios profitability?
John Arabia, President and CEO
It has been factored in, Rich. And I would agree with you, Wailea aside, Oceans Edge side, specific weekends aside. Pricing, I think will remain challenged for some time as in this transition period. I don't see any way around it. I mean, if a market is running 30% or 40%, occupancy, and let's say, maybe even a little bit better on certain days midweek, you're still not going to get pricing compression for some time. So, I think it's going to be gradual. We've assumed in our comments that rate will be depressed or remain depressed in general until we get back to some level of normalcy with occupancy.
Bryan Giglia, Chief Financial Officer
If you look at the group component, business that were rebooking into 2021 and then both, business that's being rebooked into 2022; 2021 is flat to down, percent or couple percent to what it was originally booked in 2020 or early 2021. Business has been booked into 2022, it's been negative at a premium to what we were giving for business that was booked in that we should have been booked for 2020 but cancelled in 2020 and rebooked. So from a group perspective, we're making sure that our operators are maintaining the pricing integrity, and we're seeing that in the business that has been revoked.
Rich Hightower, Analyst
Okay, thanks for the comments, guys.
Anthony Powell, Analyst
Hi, good morning guys. Similar questions, I guess, just on group. What do you think meeting players need to see precisely in order to continue with their meetings? Do they just need to see local restrictions go away or do you see things like your attendees being vaccinated, testing being provided at the hotel? Are the meeting planners asking for any new accommodation or any new types of meetings or any types of layouts, what are they kind of looking for in order to make sure that they can actually proceed with these events?
John Arabia, President and CEO
I think it's all of the above. I think there is a lot of individual conversations going on at each hotel. What are the spacing requirements, what are the local travel or gathering restrictions. I think a lot of people are going under the assumption that restrictions will continue to ease over time as more and more people get vaccinated, and as the case loads and hospitalizations decline. So, I think it's all of those things, Anthony.
Anthony Powell, Analyst
You've mentioned increased transit demand in Key West, San Diego, Hawaii, and other areas. What about the larger urban markets like Boston, D.C., Chicago, and San Francisco? Are there any signs of recovery there? What do you think is necessary to attract transient business back to those markets? Is it just local attractions like theaters, museums, and restaurants, or is there more to the future of leisure in those areas?
John Arabia, President and CEO
We are noticing some increases, but they are based on a very small foundation in certain city center locations. For example, we are experiencing a slight uptick in transient reservations in cities like Boston, Washington D.C., New Orleans, and Chicago; however, these are minor increases or are derived from a small base. The more significant increases we have observed are primarily in leisure travel. I am confident that we will eventually see growth in business transient travel as well, but we are starting from a lower base, and it will take some time.
Anthony Powell, Analyst
Okay, maybe just one more question regarding the transaction environment. You mentioned that discounts compared to prior COVID levels are decreasing as we move into this post-vaccine period. What about deals where the prices are at or above pre-COVID levels? Would you consider those types of acquisitions if the asset justifies it?
John Arabia, President and CEO
So far, I don't think I've seen anything that would trade at a premium to pre-COVID pricing. There have been some decent transactions around pre-COVID pricing, but today, I don't think there is anything that I would consider to be a premium. The things that seem to be getting closer to pre-COVID pricing would be long-term relevant real estate, especially in leisure markets or drive-to markets, or if someone is making a bet on a certain high-quality asset over time.
Anthony Powell, Analyst
All right. Thank you.
Smedes Rose, Analyst
Hi, thanks. I wanted to ask about the buyback program for up to 500 million shares. Can you discuss how buybacks fit into your overall cash usage plans for the next two quarters?
John Arabia, President and CEO
Yes, historically, we have used a buyback as a capital allocation tool. And early last year, I think we bought back just over $100 million worth of stock. As we stand here today, we are up on that trade, I believe didn't think the pandemic was coming. But you know, still bought it at a margin of safety that we thought that would look good over time, and still feel confident about that. So just philosophically, we believe that share buyback is an important tool. If you have the right balance sheet that can accomplish things. You know, it's company policy, we don't provide pricing levels, that we would buyback stock. What our board did? We as a board approved both, the ATM and the buyback as we do as annual practice just to make sure that we have those tools in place should something crazy happen or some dislocation in the market that seems that has occurred here, just even recently, not in our name but in other sectors. So those are just tools in place. As I think, you know, smashes. We are not allowed per our covenants to buy back stock right now. But hopefully, we get back into compliance at a certain point here and the not so distant future where we have those abilities granted back to us.
Smedes Rose, Analyst
Okay. And then I just wanted to ask you on the Western conversion, you mentioned about a $20 move in REIT sort of to help the returns you talked about. Is Marriott helping at all to incentivize that or are they just sort of standby and remain as a manager there?
John Arabia, President and CEO
No, I mean, first of all, we're approaching this together as there is an operating partner involved. Financially, I wouldn't say they are supporting it, but they have various incentives to make this work, and I believe those incentives are aligned. For instance, when I look at what we accomplished in Wailea, Marriott is indeed earning significantly more money than they would have if we hadn't repositioned that hotel. That's a positive outcome because that project has been quite successful, even in spite of the pandemic.
Smedes Rose, Analyst
I wasn't sure if there were any operating guarantees or breaks while you provide it. If there aren't, that's okay; I was just curious.
John Arabia, President and CEO
No.
Alexandra Ratzker, Analyst
Hi, thank you. When you are underwriting deals, could you discuss your considerations for a relatively new asset or a new market asset like Oceans Edge compared to the repositioning assets you have handled, such as Wailea? Thank you.
John Arabia, President and CEO
Sure. It's all the same process; we evaluate what we believe the asset can achieve over time compared to the competition and based on the demand drivers in the market. Then we assess whether the property requires capital investment or asset management. What I appreciate about our overall strategy is its consistent focus on long-term relevant real estate. There are various approaches to achieving this, whether it involves acquiring a brand-new property that needs management or investing in something that is considered stabilized, like the Hyatt Embarcadero. Our asset managers have identified numerous ways to enhance profitability there, particularly by repositioning the food and beverage services. We've collaborated with Hyatt to develop different sales strategies for grouping hotels, which have proven to be very effective over the past few years, excluding the pandemic period. Additionally, we have a strong core competency in deep value turnaround. When I reflect on the initial reactions to acquiring Boston Park Plaza and Wailea, they were quite negative. However, those projects have turned out exceptionally well, and I'm pleased we pursued them. Our operating partners have significant confidence in our ability to achieve positive results, allowing us considerable flexibility in our operations because they trust that we will execute effectively despite the high risks involved.
Alexandra Ratzker, Analyst
Well, good color. And then just as a follow-up any updated thinking on the long-term cost structure of your hotels versus pre-COVID levels? I mean, do you think costs will be down 10%, 15%, 5%; how are you thinking about?
John Arabia, President and CEO
Yes, as the saying goes, you should never let a crisis go to waste. There are many discussions happening between Marc Hoffman and other owners with Marriott, Hilton, Hyatt, and other operating partners regarding the future operations of hotels. The on-property opportunities include workforce innovation, organizational changes, and management restructuring. Additionally, there are several fees and services from our operating partners that I believe need to be rationalized, as we've mentioned in previous calls and various conferences. I think it is reasonable to expect, all else being equal, a 100 to 200 basis point improvement in EBITDA margin over time, which is certainly achievable.
Chris Woronka, Analyst
Good morning, guys. Yes, I'm here. Can you hear me?
John Arabia, President and CEO
Yes, we can. Go for it.
Chris Woronka, Analyst
Thank you, everyone. My first question is about the Renaissance Western Conversion in D.C. I believe you still have three other Renaissances, two of which are in markets you view positively for the long term. Will there be similar opportunities with those, or is this situation unique?
John Arabia, President and CEO
So far, this is a one-off project. But we're open to discussion and open to evaluation in the future.
Chris Woronka, Analyst
Okay, fair enough. And then, as you may begin to see more acquisition opportunities put in front of you, does this concept of new normal change your thinking at all in terms of markets that you might invest in now that you might not have previously, whether it's a Nashville or an Austin or other places?
John Arabia, President and CEO
We've considered Nashville multiple times, and it's always been on our radar. However, while demand in that market is strong, the supply situation raises concerns even though we believe in its long-term potential. This situation might slightly alter our perspective on some markets. It's natural for significant events to prompt you to reassess what you considered standard operating or investment criteria. So, yes, we have revised our outlook on a few markets, with some being less favorable than others. Nevertheless, my confidence in owning LTRR has increased; I feel even stronger about it now compared to before. In contrast, my perception of owning commodity assets has worsened. We always anticipated that LTRR would retain its value, and that has proven true during this downturn. We're receiving inquiries from buyers interested in our top-tier assets, which have maintained their value, and I expect them to continue to outperform because they align with what people are looking for.
Chris Woronka, Analyst
Okay, very helpful. Thanks, guys.
Bill Crow, Analyst
Good morning, guys. Appreciate the time and the commentary. John, on the city-wide front, and it's early, I get it. But can you point to any events coming up this year that would be kind of a canary in a coal mine, in a good way that would signal that the groups are back; something we can we can keep our eyes on?
Marc Hoffman, Chief Operating Officer
Hey Bill, it's Marc Hoffman. I can't point to a specific group but I think, as John talked about with the timing of the vaccine, I think is the most important thing. There are some key city-wides in Boston, there's a few in Chicago, and then really in Q4, there are several scattered around the country. So, I think it'll depend on how they hold. And most importantly, it'll all depend upon what the city municipalities decide.
Bill Crow, Analyst
Yes, there isn't a specific opportunity we can clearly identify for June. If it doesn't materialize, it would be a setback, but there's nothing definitive to point to. Would you agree?
John Arabia, President and CEO
No, Bill. I don't think I would attribute it to one specific group out there. I believe we'll have a clearer understanding as time progresses because each company, association, or similar entity will behave differently, whether being more aggressive or conservative. Factors such as how well the hotel aligns with their needs and whether the location's restrictions are more accommodating or restrictive come into play. There are too many variables to specify. For example, will housewares in Chicago make an appearance?
Bill Crow, Analyst
That's helpful. You mentioned that the meeting planners are more optimistic, which I hope is the case since that is their responsibility. But are the CEOs feeling the same level of optimism? Are they ready to invest in hosting events or sending people to attend them, or do you think there has been a lasting decline in group events? My question is, as you consider the overall picture, what are your thoughts?
John Arabia, President and CEO
Let's first discuss associations. I believe that associations truly want to meet, and their large gatherings are often among their biggest fundraisers. While we've all adapted to platforms like Zoom and WebEx, they simply do not work well for meetings involving several hundred people; the in-person experience is unmatched. For this reason, I think associations are eager to travel again and are looking forward to getting back to in-person events once it is safe. Now, regarding corporations, I'd like to push back a bit on what industries are thriving versus those that are struggling. Clearly, industries like hotels, cruise lines, airlines, and restaurants are currently facing significant challenges and financial difficulties, which may lead them to decline events. On the other hand, there are industries that are thriving; they are financially strong, their stock prices are high, and they remain competitive. These industries are likely in growth mode and not facing pressure to cut expenses, which suggests a divergence in the experiences of different sectors.
Bill Crow, Analyst
Yes. I appreciate it.
John Arabia, President and CEO
I'm sorry. Go ahead, Bill.
Bill Crow, Analyst
No, go ahead, John. Thanks.
John Arabia, President and CEO
In the beginning, should we expect to see greater attrition in any group that shows up? Absolutely. For example, if the association shows up, we're all familiar with attending NAREIT. I expect that at the next NAREIT, attrition will be significantly higher and attendance will be considerably lower compared to 2019. This is a key takeaway. Our meeting strategy includes carefully analyzing those attendance numbers when considering which groups will participate.
Bill Crow, Analyst
Yes, I appreciate that. If I could just ask you about external growth, my understanding is that you don't really anticipate seeing distress pricing on long-term relevant real estate, even if it requires a major makeover or new management. You simply won't see that kind of distress in those assets, and you're unwilling to sell at distressed levels. My question is, as you consider this, do you think there is more competition or different types of competition, perhaps less disciplined capital, looking at some of these deals?
John Arabia, President and CEO
Yes, there was a lot in there, Bill.
Bill Crow, Analyst
Sorry.
John Arabia, President and CEO
I have a few comments to make. Firstly, LTRR is trading at a relatively modest discount compared to commodities, although it is still at a small discount. However, it is not as large as what we’ve seen with older branded full-service hotels, where discounts can reach 20% to 30% compared to pre-COVID pricing, unless a fortunate buyer comes along. Additionally, the amount of capital raised for hotels is quite significant, as evidenced by the frequent inquiries our investment team receives from potential buyers. I believe we will begin to see a more active transaction environment as the CMBS market improves. While it's not very active at the moment, I expect it to grow stronger over time, which will benefit the transaction market. This should lead to more trades and better clarity on asset pricing. I think I’ve covered all your questions, Bill. Did I overlook anything?
Bill Crow, Analyst
No. I think you got it all. John, I appreciate you. It's always a good conversation. I hope the family is well, and we'll talk to you soon.
John Arabia, President and CEO
Thanks, Bill. You as well. Yes, boys are great, wife is great. Thank you.
Operator, Operator
Today's final question comes from Dori Kesten.
John Arabia, President and CEO
Yes, thanks. I think that you said Dori?
Dori Kesten, Analyst
Hey John, Bryan and Marc. So, just another look at leisure pricing. When leisure demand does really re-accelerate? Do you expect to see an outsized increase in the use of loyalty points or do you think this will remain still more cash paying?
John Arabia, President and CEO
Yes, we've actually seen quite an increase; people are starting to really redeem their points. Marc, do you have any insights onto that?
Marc Hoffman, Chief Operating Officer
Yes. I think we'll continue to see as demand comes back and occupancy comes back, two of the premium locations. Clearly, right now in Wailea a lot of our demand in the 30% to 40% range, depending upon future reservations is loyalty. And I think you'll continue to see that in places people want to go; in New Orleans, Boston, etcetera.
Dori Kesten, Analyst
Can you explain what impact that has on your rate? If you take away the 30% that are redeeming, what would the rate growth look like?
Marc Hoffman, Chief Operating Officer
Yes. The only significant hotel for us with points is Wailea. The rest of our portfolio generates a very small percentage of their business through redemptions. At Wailea, we have a strong redemption rate, and most of our redeemed rooms get upgraded to better views. We value the redemption base, and during times like this, it doesn't impact our rate. As John mentioned, our rates are up 13% year-over-year, and even with slow demand, our future bookings for the next six months look very promising.
Dori Kesten, Analyst
Okay. Thanks, Marc. John, one last one.
John Arabia, President and CEO
Yes, go for it.
Dori Kesten, Analyst
So, let's say, what were you going to say you're up?
John Arabia, President and CEO
It was in Marc's comment; in November, we were up 13%.
Dori Kesten, Analyst
Okay. And if we fast forward three years, what is your gut John, on how leisure business transient and group demand shifts within your portfolio?
John Arabia, President and CEO
Looking ahead three years, how does the shift between leisure and commercial look? There are too many variables involved. I don't have enough information to provide an educated guess. Ultimately, it will depend on the hotels we acquire and those we divest, but I can't give a specific answer on that.
Operator, Operator
Thanks, everybody. Really appreciate, again, the interest in in Sunstone. I know the call went quite long today. I appreciate all of the questions and your interest. Please stay safe and get back out on the road. Have a great day. We're around, if needed. Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You now disconnect.