Xenia Hotels & Resorts, Inc. Q4 FY2021 Earnings Call

Hello, and welcome to the Xenia Hotels & Resorts Fourth Quarter and Full Year 2021 Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. I would now hand over to your host, Senior Financial Analyst. Over to you, Aldo.

Thank you, Alex. Good afternoon, and welcome to Xenia Hotels & Resorts Fourth Quarter and Full Year 2021 Earnings Call and Webcast. I'm here with Marcel Verbaas, our Chairman and Chief Executive Officer; Barry Bloom, our President and Chief Operating Officer; and Atish Shah, our Executive Vice President and Chief Financial Officer. Marcel will begin with a discussion on industry fundamentals, our quarterly and annual performance and an update on our portfolio strategy. Barry will follow with more details about our operating results, recent operating trends and status of our capital expenditure projects. And Atish will conclude our remarks with an update on our balance sheet. We will then open the call for Q&A. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings materials that we issued this morning, along with comments on this call, are made only as of today, March 1, 2022, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of our non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in this morning's earnings release. The property-level portfolio information we'll be speaking about today is on a same-property basis for 33 hotels. Subsequent to the sale of Hotel Monaco Chicago in January, certain information is for current same-property servicing 32 hotels. An archive of this call will be available on our website for 90 days. I will now turn it over to Marcel to get started.

Thanks, Aldo, and good afternoon to all of you joining our call today. We are pleased to be sharing our fourth quarter and full year 2021 results with you today as well as some recent developments that we believe to be very positive for our growth outlook over the next several years. After a slow start to 2021, industry fundamentals gradually improved as the year progressed, particularly after our vaccine rollout accelerated in the second quarter, leisure demand increased significantly, while corporate and group demand started recovering at a more moderate pace. Despite the emergence of the Delta variant over the summer, and the Omicron variant post-Thanksgiving, we experienced an upward trend in occupancy throughout the year, and the gap to 2019 RevPAR diminished substantially as we finished out 2021. Importantly, we were able to return to positive adjusted EBITDAre in March, and we were able to maintain and grow this positive cash flow through the remainder of the year. During the fourth quarter, we reported a net loss of $22.9 million. Adjusted EBITDAre and adjusted FFO per share each remained positive at $48.9 million and $0.25, respectively. We are pleased that 31 of our hotels and resorts achieved positive hotel EBITDA for the year, which translated to adjusted EBITDAre of $108.1 million and adjusted FFO per share of $0.28. Our same-property portfolio generated a hotel EBITDA margin of 27.2% for the quarter as a result of a continued focus on cost controls by our operators and benefits from real estate tax reductions and cancellation fees. Our same-property RevPAR for the fourth quarter was only 17.5% below the same period in 2019, representing another sequential improvement over the first three quarters of the year when we experienced RevPAR declines of 63.3%, 38.6% and 22.9% in the first, second and third quarter, respectively. Average rates remained a bright spot, as our same-property ADR increased 7.1% compared to the fourth quarter of 2019. An impressive 25 of our hotels and resorts achieved ADRs that surpassed those reached during the same quarter in 2019. The fourth quarter was our strongest quarter of the year, despite the difficult seasonal slowdown in December and the early impact from the Omicron variant. The two highest ADR and RevPAR months of 2021 were both in the fourth quarter, with October being the strongest month of the year and November not far behind. Impressively, ADRs for every month during the second half of the year surpassed those achieved during the same months in 2019. The emergence of the Omicron variant and resulting spikes in positive COVID-19 case counts throughout the country, coupled with the typical seasonal decline in leisure travel, caused a slowdown in overall demand in January. The core operating group segments were most significantly impacted, and we were confronted with a meaningful number of group cancellations and postponements. As a result, our current same-property portfolio RevPAR in January was markedly lower than we experienced in December, and RevPAR was approximately 37% below January 2019 RevPAR. This decline was substantially greater than the approximately 8% decline we achieved in December, which was the smallest gap since the beginning of the pandemic. However, travel patterns have improved significantly over the past several weeks as case counts have fallen dramatically, and evidence has mounted of the new variant causing less severe illness and lower percentages of hospitalizations and death. Based on our preliminary estimates, February RevPAR should be approximately $157, which represents an approximate 19% decline versus a very strong February of 2019, with ADR up approximately 6% over 2019 levels. The projected RevPAR for the month represents the highest absolute RevPAR since the onset of the pandemic, with both occupancy and ADR surpassing the levels achieved in October. We are encouraged by these recent trends and our forward-looking trends and are optimistic about a strong recovery as the year progresses. We continue to be bullish on our growth prospects in the years ahead. We believe that we have strategic advantages, including our geographic footprint, the quality of our assets and operators, our strong balance sheet and a number of embedded growth opportunities, some of which we have highlighted during previous earnings calls and presentations. We believe that we are in the early stages of a strong multiyear recovery for upper upscale and luxury hotels and resorts, and that our company is positioned well to drive superior results. While we have already benefited from our geographic diversification and focus on Sunbelt locations during the earlier stage of the recovery, we continue to have many opportunities for growth throughout our portfolio, particularly as corporate and group demand recovers, as we expect it will. We have continued our focus on identifying and executing internal growth opportunities, as we have done in the past with projects such as the ones we recently completed at Park Hyatt Aviara and Hyatt Regency Grand Cypress. For 2022, we are planning to substantially increase our capital expenditures, however, with reduced levels of spend than we had in 2020 and 2021 when we responded to the impact of the pandemic by emphasizing liquidity and cash preservation. Barry will provide details on the most significant projects we are intending to complete or start this year in his remarks. We also remain optimistic about the growth we expect to experience as a result of Hyatt Regency Portland stabilization over the next several years as an essentially still newly opened hotel. I will now turn to the transaction activity we have recently completed and the exciting announcement we made this morning. In November, we completed the previously announced sale of Marriott Charleston in West Virginia, and in January, we completed the sale of Hotel Monaco Chicago, a transaction that we also announced before the end of the year. Through these two dispositions, we exited two challenging markets with what we believe to be tough operating environments and a difficult path to get back to prior peaks. We were particularly pleased with the pricing at an almost 17x 2019 EBITDA multiple we achieved on the opportunistic sale of Hotel Monaco Chicago, which was one of only two hotels in our same-property portfolio that had negative hotel EBITDA in 2021. Over the past several quarters, we have consistently maintained that we would be opportunistic but patient as it related to potential acquisitions. The announcement we made this morning regarding our agreement to acquire W Nashville is reflective of our efforts during this time as we were able to identify a potential acquisition that meets all of our investment criteria, including pricing as we believe it reflects an appropriate risk-reward balance. We are extremely excited that we have been able to reach an agreement to acquire this outstanding hotel. Nashville is one of the most dynamic growth markets in the country and has been a target investment market for us. We were able to move decisively once we became aware of the opportunity to acquire the hotel because of the strong balance sheet and liquidity we achieved and maintained through our recent balance sheet activities. We believe this acquisition hits the bull's eye as it relates to our investment strategy. Nashville is a high-growth top 25 lodging market with significant and growing year-round corporate and leisure demand. We have extensive experience with Marriott managing some of our most significant assets. And the hotel is a very simple luxury lifestyle hotel that has many truly unique attributes and that we believe is the best hotel in the market. The hotel opened just a few months ago and is extremely well designed to be able to cater to any demand segments, as evidenced by outstanding guest feedback since the October opening. In our view, this hotel is in a class of its own in the Nashville market, particularly as it relates to its rooms and suites product, its food and beverage facilities and its star amenities. There are six food and beverage venues in the hotel, including two destination restaurants by renowned chef Andrew Carmellini. Additionally, the pool, rooftop and outdoor entertainment, dining and meeting areas are unrivaled in Nashville. And while this almost $330 million acquisition is a large transaction for us, we are comfortable with having this level of concentration in one of the strongest economic growth markets in the country. While supply additions in Nashville have been significant over the past decade, and a number of projects will still be added to the supply over the next several years, the market has been resilient, and demand and RevPAR growth has consistently outpaced supply growth, resulting in one of the highest RevPAR CAGRs of any of the top lodging markets. We strongly believe that luxury demand in the Nashville CBD West End submarket will continue to experience substantial growth in the years ahead, and this unique luxury lifestyle hotel is the perfect embodiment of what the high-end leisure and corporate clientele will seek out as their destination of choice in the market. As we highlighted in our release this morning, we expect W Nashville to be one of the leading contributors in our portfolio in the years ahead, with hotel EBITDA reaching between $25 million and $30 million upon stabilization. We are thrilled to be adding W to our stable of Marriott brands in our portfolio. We have long had a deep relationship with Marriott and are looking forward to owning a flagship W hotel in the U.S. as Marriott evolves and refreshes the brand. With significant capital investments being made in many existing W hotels and exciting new W hotels opening and in Marriott's pipeline domestically and internationally, we are optimistic about the future of the brand and the contributions it will make to what is an outstanding hotel from a physical and location perspective. With our asset management expertise and Marriott's operating prowess and brand power, we are excited about what lies ahead for W Nashville under our ownership. Barry will now provide additional details on our fourth quarter performance, recent operating trends and the status of our current and planned capital projects.

Thank you, Marcel, and good afternoon, everyone. In the fourth quarter, our same-property portfolio occupancy was 56.4% and an average daily rate of $241.11, resulting in RevPAR of $136.01. The fourth quarter marked the best-performing quarter in 2021, coming in at 7.1% higher in ADR and 17.5% below in RevPAR compared to the fourth quarter in 2019, and beating every other quarter in 2021 in terms of occupancy, ADR and RevPAR achieved. Despite some weaker-than-expected corporate and group business related to the Delta variant, October and November were both strong months, with occupancy coming in at 58.6% for each month, each second only to the July peak of 59.2% for the year. October achieved the highest ADR and RevPAR of any month in 2021 at $248.69 and $145.71, respectively, bolstered by five weekends, which allowed our hotels to capture additional leisure demand. ADR in November was $238.05, resulting in RevPAR of $139.45. In December, we began to see some expected moderation in occupancies during the month, driven primarily by seasonal declines. However, despite these slowdowns, December achieved an ADR of $235.92, or 15.2% higher than 2019, and RevPAR of $122.99, or just 7.8% below the same month in 2019. During the quarter, we had six hotels achieve occupancy above 75%, primarily in hotels that are leisure-focused and drive-to markets such as Key West, Charleston, South Carolina, Savannah, Birmingham and Napa, all of which continue to show substantial strength. We also had 25 hotels representing 74% of the portfolio achieve higher ADRs in the fourth quarter of 2021 than they did in the fourth quarter of 2019. We commend our hotels and asset management team on identifying and pursuing opportunities to drive ADR and take advantage of the consumer who's willing to pay a premium for quality properties like ours and our focused efforts on activating on-site amenities. For the full year, we had five hotels achieve greater than 75% occupancy, again, primarily at the same hotels in our leisure-focused and drive-to markets. We also had 15 hotels achieve higher ADRs in 2021 than they did in 2019. Group cancellations in the fourth quarter amounted to approximately $8.5 million of rooms revenue, which have been on the books for the fourth quarter of 2021, primarily related to the Delta variant. We recognized approximately $5 million in cancellation and attrition fees during the fourth quarter. Atish will discuss 2022 group pace and the impact of group cancellations as a result of the Omicron variant on Q1 of 2022 in more detail shortly. In terms of profit, all 33 of our same-property hotels achieved positive hotel EBITDA for the quarter, with 13 properties exceeding results compared to the fourth quarter of 2019. Eleven hotels achieved EBITDA margins greater than 30% for the quarter, and 16 hotels generated EBITDA margins greater than 2019. For the full year, 16 hotels were able to generate EBITDA margins of above 25% as a result of efficient cost controls and optimization of operations. Our properties under respective management companies continue to do an excellent job in controlling margins. For the fourth quarter, hotel EBITDA was $54.1 million, a decline of 17.5% on a total revenue decline of 18.5% compared to the fourth quarter of 2019, resulting in hotel EBITDA margin growth of 32 basis points to 27.2%. For the full year, hotel EBITDA declined 52.3% on a total revenue decline of 39%, resulting in a hotel EBITDA margin of 21.7%, down approximately 600 basis points from 2019. Our hotels, thanks to the efforts of our operators, continued an amazing job controlling expenses, while ensuring a high-quality guest experience. In the fourth quarter, rooms expenses declined by over 18% compared to 2019, while undistributed expenses declined by 13.7%. For the full year, rooms expenses declined by approximately 35%, while undistributed expenses declined by approximately 26%. Within the undistributed expenses, while the greatest declines were seen in A&G and sales and marketing, utilities expenses declined by approximately 7.6% for the year, related in part to lower occupancy levels, but also as a result of our hotels having become more efficient in their use of electricity and natural gas, despite rate increases in many markets. Our operators continue their work in refining service models and staffing levels. For the fourth quarter, total employee compensation, as reported by our operators, declined by 21.5%, and for the full year by 36.7%. We currently estimate that wage rates across the portfolio, based on our operators' budgets, will increase by approximately 5% in 2022 versus 2021. Leisure business continues to be strong throughout the portfolio, with increased booking windows for our most popular drive-to destinations and resorts throughout the first and second quarter. Despite significant success in the leisure segment, we note that occupancies for the year of our three largest resorts, Park Hyatt Aviara, Hyatt Regency Scottsdale and Hyatt Regency Grand Cypress, ran between 35% and 56% occupancy, leaving room for significant upside at these hotels as high-rated and banquet-intensive group business returns to these properties in 2022 and beyond. Despite the seasonally slow and Omicron-impaired levels of business travel our portfolio experienced in January and early February, we're now seeing a significant pickup in corporate volume accounts. Business travel has notably picked up in recent weeks, as evidenced by increases in occupancy levels on Monday, Tuesday and Wednesday nights as well as transient business on the books to March. I will end my remarks today with a review of our completed and upcoming major capital expenditure projects. During the fourth quarter and year ended December 31, 2021, the company invested $12.7 million and $31.8 million, respectively. In the fourth quarter, we completed the restaurant and lobby renovation at The Ritz-Carlton Pentagon City, which was completed in mid-October, and the development of the Regency Court, a new 5,300 square foot outdoor social venue at Hyatt Regency Scottsdale that was completed in late November. During the fourth quarter, we made substantial progress on the renovation of the restaurant, lobby and guest rooms at Waldorf-Astoria Atlanta Buckhead. The restaurant lounge opened in mid-February, and we anticipate that the guest rooms project will be completed later this month. In 2022, we estimate spending approximately $95 million on capital expenditure projects. We continue to be excited about two major projects, which we are accelerating to take advantage of current business conditions, which will primarily take place in 2022. The first is a comprehensive renovation of Grand Bohemian Hotel Orlando, including guest rooms with substantial tub-to-shower conversions, restaurant and bar, lobby, rooftop pool area and meeting space, which will commence in the second quarter of 2022 and is expected to be completed in phases, concluding in the second quarter of 2023. The second is a comprehensive renovation of the Kimpton Canary Hotel Santa Barbara, including guest rooms, restaurant and bar, rooftop, lobby and meeting space, which recently commenced and is expected to also be completed in phases, concluding in the first quarter of 2023. In 2022, we also plan to renovate the meeting space and convert the existing lobby bar to a Starbucks outlet at Fairmont Pittsburgh, renovate the meeting spaces at Marriott Dallas Downtown and Royal Palms Resort & Spa, complete bathroom renovations at Marriott Woodlands Waterway Hotel & Convention Center, renovate the premium suites at The Ritz-Carlton Denver, including the addition of three new guestroom keys, and commence planning and design for a comprehensive renovation at Hotel Monaco in Salt Lake City. In addition, we plan to commence work on a significant upgrade to the spa and wellness components at Park Hyatt Aviara, along with a comprehensive renovation of existing golf course features which were deferred during the initial renovation, but for which we now have even stronger conviction given the positioning and performance of the property. Finally, we continue to focus on numerous building infrastructure projects to enhance building resiliency and extend the useful life of our physical structures, in addition to focusing on a number of environmentally sustainable projects throughout our portfolio. With that, I will turn the call over to Atish.

Okay. Thanks, Barry. I will provide an update on our balance sheet and a high-level outlook for 2022. Our balance sheet continues to be strong, with no debt maturities until 2024, significant liquidity, and nearly all debt currently at swapped or fixed interest rates. With swaps to fixed and strong banking relationships, we're in a good position to take advantage of opportunities such as the W Nashville. Our liquidity, inclusive of available cash and our line of credit, is currently approximately $950 million. In January, we paid off the $65 million mortgage loan on The Ritz-Carlton Pentagon City, thereby lowering our cost of debt to sub-5%. Looking ahead, we intend to acquire W Nashville with cash on hand. As we get further into the year, and depending on other opportunities, we could access the equity or debt markets to raise additional capital or continue to evolve our balance sheet. Similarly, as business rebounds and after exiting the covenant waiver period, we could consider other tools to drive shareholder return, such as a quarterly dividend or share repurchase under our existing Board authorization. As to a high-level outlook for the year, we have a positive view based on the demand trends and booking activity that we're seeing, with transient demand and the corporate transient trends strengthening, as Barry mentioned. Turning to group demand. Our pace information is as of the end of January for our current same-property set. At that time, room revenue pace for 2022 was down 27% versus where we were in January of 2019, and that's for the full year. For the first quarter, the decline is greater than 40%. For the second and third quarters, we are pacing down about 20%. And for the fourth quarter, we are pacing down about 10%. Focusing on just room rates. For the full year of 2022, we're pacing up about 4%. For the second half specifically, room rates are pacing ahead by over 9%. In current group trends, group activity for the remainder of this year continues to pick up. Our hotels continue to see near-term bookings, and we have picked up over half the group revenue that canceled for the first quarter of 2022, with most of that rebooking concentrated in the second quarter of 2022 and a lesser amount in the second half of 2022 and into 2023. Between cancellation income and rebookings, we expect to recapture most of the profits from the group cancellations due to the Omicron variant. One thing to keep in mind in terms of comparing 2022 to 2019 is that between the start of 2019 and now, we have sold eight assets, which contributed nearly $55 million of hotel EBITDA in 2019. This information is further broken out by quarter in the historical current same-property tables in our earnings release schedules. Moving ahead. While we are not yet ready to provide 2022 earnings guidance, we wanted to provide some thoughts on the cadence of earnings as well as some estimates for items that are more under our control. As to the cadence of earnings that we expect in 2022 in terms of hotel EBITDA, we expect hotel EBITDA weighting by quarter to be as follows: first quarter, about 20%; second quarter, just under 30%; third quarter, about 25%; and fourth quarter just under 30%. That weighting is our current estimate; it assumes no change in economic conditions or additional variants of COVID-19. Turning to estimates for certain expense items. As to cash G&A expense, we expect it to be approximately $22 million. The increase to last year reflects higher wage and benefit costs and the lapping of payroll tax credits. As to interest expense, we expect it to be approximately $77 million, which is a decrease of over 5% to last year, reflecting changes in our balance sheet over the course of the last year. As to capital expenditures, we expect them to be approximately $95 million to cover the projects that Barry discussed. On W Nashville, assuming the purchase closes by the end of the first quarter, we expect to generate between $13 million and $15 million of hotel EBITDA during our ownership period in 2022 as the hotel ramps up. To wrap up, each quarter of 2021 showed strengthening trends across our portfolio. We finished 2021 on a high note, despite the emergence of COVID-19 variants. As compared to other high-end portfolios, we outperformed last year due to our favorable market and asset mix. We expect that momentum to continue this year as the recovery and fundamentals continue. Our properties are affiliated with some of the best brands and managers, are in good condition and have the product offerings and amenities that travelers are currently seeking. In addition, our properties located in several Sunbelt markets, such as Houston, Orlando, Phoenix, Atlanta and San Diego, are still well behind peak levels of RevPAR and earnings, so there is significant room for earnings growth as corporate and group demand recovers and augments leisure demand. In addition to our asset profile, the strength of the balance sheet and our transactional expertise gives us confidence that we can be active participants in the multiyear lodging upcycle, which we believe is just getting started. And with that, I'll turn the call back over to our operator, Alex, for our Q&A session.

Our first question for today comes from David Katz of Jefferies.

I apologize if I missed it, but with respect to this Nashville hotel, was this a marketed deal? And I'm curious what commentary you might have about what marketed deals are looking like these days? And how you would qualitatively gauge the competition for marketed deals?

Yes, David. This was actually not a broadly marketed deal. It was not listed with a broker. So you would call it an off-market deal, which it certainly was. We do know that there were certain other potential buyers that were looking at the transaction. From that standpoint, it was probably a competitive process, but with a very limited group of potential buyers that were looking at it. I talked in my prepared remarks a little bit about us being able to jump in with a lot of conviction around this particular opportunity. We really believe that's the reason why we had to move decisively on this transaction. It was about being very decisive, being able to move quickly and get a deal done with what we believe is a phenomenal hotel.

All right. And when you look at it, it looks like—sorry, go ahead.

On the process for marketed properties: it's obviously still a very competitive process when you're looking at deals that are being brokered. We felt very fortunate to actually find an opportunity like this where we could really separate ourselves from the pack by being decisive and the size was appropriate for us.

Understood. And so when we look at a hotel like this, is there value that you can add to it over time from an operating perspective? Or is this just positioning in a terrific market with a brand-new asset and the tide sort of carries its value along?

Great question. We think it's a combination of both. We believe there's a fundamental shift going on in the country as far as the most dynamic markets and where you want to be for the long term. From that perspective, this is a bull's-eye location where we want to be invested for the long term. We're also very excited about the fact that it's a property managed by a brand with which we have a very long relationship. We can essentially get in at the ground level and asset manage from the start with Marriott. We believe there's a lot we can bring to the table through our expertise that will help this property be even more successful over time.

Our next question comes from Bill Crow of Raymond James.

Atish, let's start with you. The $5 million of cancellation fees received in the fourth quarter, what would the margins have been had that business actually shown up?

The cancellation fee income was about $2.5 million more than the fourth quarter of 2019, so it did benefit margin by over 100 basis points. It's hard to give you the exact number of what it would have been had the business showed up, but that gives you a sense of what the impact was in the fourth quarter. Interestingly, for the full year, cancellation and attrition fees were not that much ahead of where they were in 2019 — only about $1.5 million for the full year. So it was really the timing of when we got those cancellation and attrition fees compared to 2019.

And how much have you — or do you anticipate collecting in the first quarter in cancellation fees? And I assume that's in your quarterly cadence that you talked about?

It wouldn't be nearly as much as that — I don't have a precise estimate at this point, but a lower number. I think what you saw in the fourth quarter is cancellation fees that came in from Omicron, but probably some leftover cancellations from Delta as well. That's what drove the number and the timing last year. I think that will moderate as we go into this year.

If I could just ask on the W acquisition, how did you get comfortable with the W brand? Clearly, many have had questions about it over the last 10-plus years. And how do you think about permanently financing that acquisition?

From our perspective, first and foremost, we look at the asset and location. This hotel could be many things from a luxury lifestyle perspective, and we think there's a lot of positive momentum in Nashville. On top of the asset itself, we think the W brand is additive, particularly with the refreshing and evolution Marriott is doing with the brand. Significant capital is being invested in W assets; there are some assets that need refreshment, but there are also some phenomenal assets in the U.S. This hotel helps elevate the W brand in the U.S. and is a flagship hotel for the brand going forward. We see a lot of positive momentum that we'll benefit from.

On the financing question: our plan is to fund this with all cash. While this could be an attractive candidate for secured financing at some point, we're not ready to commence that right now. If you look at our balance sheet, a few years ago we had eight hotels with secured financing; now we have four. We've been active on the public debt side and are pleased with that tool we can continue to utilize. We may raise equity or debt capital in the future, but we don't have specific plans for this asset at this point.

Our next question comes from Austin Wurschmidt of KeyBanc.

Just going back to the acquisition, it certainly checks a lot of boxes. How did you get comfortable with the price per key? And while I know it just recently opened, I suspect some portion of the construction costs might have been baked pre-pandemic. Curious about your thoughts on how it stacks up the price tag versus your estimate of replacement cost today? And then can you also speak to how conservatively you underwrote to get to that sort of mid-8% yield at the midpoint?

From a price-per-key perspective, we recognize that for the national market it's a number higher than some recent transactions. But there's so much positive momentum and economic growth in Nashville that we believe we won't be the highest price-per-key transaction for long in this market. Importantly, you're not just buying 346 hotel rooms; you're buying a significant income stream from food and beverage facilities and other high-margin revenue. When you think all in, it's an attractive cash flow stream across venues. We've been underwriting opportunities in this market for years and are comfortable we're buying the best hotel in this market with the best operational upside. Regarding development costs, this project took many years to come together; construction costs have risen substantially over the last few years, so prior basis would look very different today. There are a lot of factors in play, and when you compare it to other similar markets, we feel very good about the risk-reward of this investment versus alternatives. We've been patient seeking the right acquisition, and this was the right opportunity. If we hadn't bought it at this level, someone else might have and may have paid even more.

That's helpful. On the underwritten yield in the mid-8s: we're in a transitional period of hotel demand with high inflation benefiting ADR and margins and potential operating efficiencies post-pandemic. Can you give a sense of what you underwrote from an ADR and margin perspective? Is it the new paradigm or were you more conservative to reach the range of outcomes for hotel EBITDA?

We view this hotel as benefiting from both strong leisure demand and corporate/group demand. It plays to the current consumer given its outdoor spaces, dining, pool and amenities — almost like an urban resort. For stabilization, we expect RevPAR to be over $300. We expect a fairly balanced mix between food and beverage and rooms revenue, and we underwrote margins to be about the low 30s, which compares favorably to our pre-COVID portfolio margin of about 28%. We believe the EBITDA opportunities for this hotel are significantly higher than our portfolio going into COVID, and our underwriting reflects that conservatively.

Our next question comes from Michael Bellisario of Baird.

One more follow-up on transactions. I know you haven't closed Nashville yet, but going forward, how are you thinking about capital allocation in terms of possibly selling another property to partially fund what you're buying now? Any updated thoughts on buy versus sell on a go-forward basis would be helpful.

We are always looking to upgrade the portfolio. We're constantly analyzing potential dispositions, particularly if we need to make additional capital investments in certain assets. This acquisition does not necessarily change our approach to potential dispositions, but you can expect us to critically evaluate additional capital investments and consider harvesting value from some assets. In the short term, any dispositions would likely be smaller assets rather than seismic shifts in the portfolio.

Got it. And switching gears, Hyatt announced category changes for many hotels. Two of your three highest EBITDA-producing hotels last year are moving up one category. How does that affect demand, EBITDA trends, and loyalty redemptions and bookings at those hotels this year compared to if those changes hadn't occurred?

As you know, brands move categories year-to-year. We were pleased that Grand Cypress and Key West were moved up because each was a leader in its market and arguably underpriced on a redemption basis. With increased redemption levels, our base redemption level moves up as well. But the upside next year isn't primarily from redemptions; it's from more compression dates and higher demand. We saw many nights in February and March where we reached higher stairstep levels where redemptions are based on a percentage of ADR. So there were no negatives from Hyatt's moves, and there are even some behind-the-scenes positives related to the significant rate increases in Aviara year-over-year given the renovation, where we'll have a higher base redemption rate.

When you talk about rates being higher, is that just a function of Q1 2022 being much better than Q1 2021, or do you expect that to be true throughout the year?

If you look at Grand Cypress running in the mid-50s last year, we did not have a lot of compression dates. We will have a lot more compression dates this year, and that's what we've been seeing in February and March. We continue to see that at Hyatt Regency Scottsdale.

Our next question comes from Thomas Allen of Morgan Stanley.

Two more questions on Nashville. First, when do you expect to get to the $25 million to $30 million of stabilized EBITDA? Second, do you own any other properties that have about half rooms revenue versus other revenue? How do you think about underwriting those kinds of assets versus others?

We underwrote stabilization in the three to four year range. It could happen somewhat faster, but that's our assumption. Regarding other properties with similar mixes, Royal Palms is a smaller resort that generates relatively more from food and beverage than rooms, so that's one example. When underwriting F&B-heavy assets, it's about location relevance and facility strength in the marketplace. Those venues need to be sustainable cash flow generators. That's not too different from rooms-heavy assets because a lagging room product will also require capital investment. For this asset, the significant F&B venues, outstanding pool and rooftop are all highly relevant to the Nashville market and help fill rooms across demand segments, whether leisure or corporate.

A follow-up on brand standards: earlier there was commentary that brands want to enforce standards again. Where are we in that trajectory, and how do you feel about brand standard implementation now?

Brands want a more unified product and are evaluating how best to roll those standards out. We expect the process will take some time. We're not terribly concerned about the outcomes for our portfolio. Over the last two years we've been aggressive in getting facilities and operations back close to pre-pandemic levels and, where appropriate, keeping restaurants open, which has benefited food and beverage revenues. As brands develop standards, we expect a more reasonable and balanced approach, with continued dialogue between owners and brands on what makes sense for each property.

Our final question for today comes from Tyler Batory from Janney.

This is Jonathan on for Tyler. First, regarding rate strength in the quarter, is that all coming from leisure? Or is there corporate or group demand impacting rates positively or negatively? Any color on your expectation for rates as we move through 2022?

In Q4 2021, leisure was a significant piece, particularly in December. But there was also a lot of very good quality group business in October and November. While some of it was lost due to Delta, the business we did have was high-quality in rate and banquet spend per occupied room. That was a notable trend. Volume corporate was weaker, both in demand and rate. For 2022, Atish touched on group rate and booking pace; we see particular strength in group rate for the latter half of 2022 compared to 2018/2019. Near-term transient demand looks strong for March and into April, with continued leisure strength and notable pickup in volume corporate demand.

Very helpful. For Marcel — the CapEx guide being essentially back to pre-pandemic levels: is that a vote of confidence in the pace of recovery and positioning the portfolio for the recovery, or is it catch-up CapEx you feel comfortable addressing now that you have solid liquidity?

It's more the first point: we're confident in the recovery and where we are today. We scaled back spend substantially in 2020 and 2021 to preserve cash and liquidity. We have more confidence in the recovery now. Some projects were pushed back from prior years, but much of the spend is on renovations where we expect meaningful ROI — particularly the two larger projects in Orlando and Santa Barbara. We have strong conviction those investments will position us well as the recovery takes hold.

We have no further questions for today, so I will hand back to Chairman and CEO, Marcel Verbaas, for any closing remarks.

Thank you. Thanks, everyone, for joining us today. I know it's been a long earnings season for many of you. We're clearly excited about where we are with the company, how we performed in the fourth quarter, and extremely excited about the W Nashville acquisition. We're optimistic about what this year will bring for us. We look forward to continuing our dialogue and speaking to you as the year progresses.

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