Xenia Hotels & Resorts, Inc. (XHR) Q3 2022 Earnings Call Transcript

Good afternoon, everyone. Thank you for joining today's Xenia Hotels & Resorts Q3 2022 Earnings Conference Call. My name is Tia, and I will be your moderator. I would now like to introduce your host, Amanda Bryant, VP of Finance. Please go ahead.

Thank you, Tia. Good afternoon, and welcome to Xenia Hotels & Resorts Third Quarter 2022 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 our quarterly performance and recent transactions. Barry will follow with more details about our operating trends and capital expenditure projects. And Atish will conclude our remarks with an update on guidance and 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 release that we issued this morning, along with the comments on this call, are made only as of today, November 2, 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 non-GAAP financial measures to net loss and definitions of certain items referred to in our remarks in this morning's earnings release. The third quarter property-level portfolio information we'll be speaking about today is on a same-property basis for 32 hotels. This excludes Hyatt Regency Portland and the Oregon Convention Center and W Nashville. 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, Amanda, and good afternoon to all of you joining our call today. As we reported this morning, we are seeing further momentum across our portfolio as business transient and group demand continue to recover. Overall, business picked up meaningfully in mid-September, providing encouraging evidence of the seasonal transition in our business from primarily leisure demand to a more traditional mix of leisure, corporate transient, and group demand. RevPAR for the quarter declined 2.6% compared to the same period in 2019. Overall demand accelerated in September, with RevPAR growth of 2.7% as compared to 2019, marking a reversal from modest RevPAR declines in July and August, driven by improved occupancy that significantly closed the gap to 2019 as compared to prior months. Average daily rate growth in the quarter was a solid 15.6% as compared to 2019, offset partially by about 12 points lower occupancy as compared to the third quarter of 2019. We reported a net loss of $1.7 million for the quarter. Adjusted EBITDAre was $53.8 million, and adjusted FFO per diluted share was $0.31. Same-property hotel EBITDA of $52.2 million represented an increase of 1.4% from the third quarter of 2019, marking the second consecutive quarter of growth relative to 2019. Third quarter results were mixed compared to our internal expectations. Same-property RevPAR matched our forecast for the quarter, albeit slightly more weighted towards ADR than occupancy. Same-property hotel EBITDA margin continued to show improvement over 2019, increasing by 48 basis points for the third quarter, which followed an outsized 365 basis point improvement as compared to 2019 in the second quarter. The seasonal drop in margins that typically occurs in the third quarter relative to the second quarter was greater than we had projected. Third quarter margin gains were more subdued due to several factors, including hotels being more fully staffed to meet anticipated customer demand, and higher expenses in areas such as utilities. Barry and Atish will provide additional detail on our third quarter operations and our expectations for the balance of the year in their prepared remarks. Regarding results of some of our newer assets, we are pleased that Park Hyatt Aviara continues to perform in a highly encouraging manner. The transformational renovation of the resort has allowed the property to significantly increase rates compared to those achieved pre-acquisition, as evidenced by our estimated October ADR increasing more than 50% compared to October 2019. We are forecasting that the property will achieve approximately $18 million in EBITDA in 2022, which is already within the stabilized range we've projected upon acquisition. However, we believe that significant upside remains as the property has not yet achieved its expected stabilized occupancy. As the operating team continues to optimize its sales strategy and demand mix, we believe substantial embedded growth should be unlocked in the years ahead. Barry will provide an update on the final components of the renovation, which we believe should further enhance stability to optimize results at the resort. Meanwhile, Hyatt Regency Portland continues on its path towards stabilization as it benefited from a number of citywide groups and events in the third quarter as Portland's reopening is gaining momentum. The property is making good progress, building its book of group business, with group pace for 2023 as of the end of the third quarter exceeding the pace for 2022 at the same time last year by over 20%. The property's excellent physical condition, as it's still essentially a new hotel, and its differentiated locations around significant demand generators, such as the Oregon Convention Center and the Moda Center, continues to position us well to grow business trends in leisure and group business that we expect will be a significant driver of overall demand. W Nashville continues to ramp in its first full year of operations, with third quarter results that were softer than projected, primarily because of weaker-than-expected summer occupancy and food and beverage revenues. Importantly, both our asset management team and the hotel's operating team are continuing to learn the seasonality of the market in general and the hotel in particular, and important lessons were learned as it relates to the optimal group and transient segment mix and rate strategy. The property also continues to work on optimizing the operations and marketing of its high-quality and distinctive food and beverage amenities that we expect will benefit us in the months and quarters ahead. As with many other assets in our portfolio, we are encouraged by recent demand trends, as evidenced by the hotel achieving RevPAR of approximately $320 in October. We continue to be strong believers in the Nashville market and the hotel's ability to capture more than its fair share, due to its extensive and high-quality facilities. Nashville continues to be an exciting growth market, as further evidenced by the recent announcements of the agreement to build a new multifunctional stadium with an expected cost of more than $2 billion that will be the new home of the Tennessee Titans. We believe both Hyatt Regency Portland and W Nashville will be meaningful growth drivers in the years ahead, and we remain confident that both hotels will achieve the stabilized EBITDA we expected with each of these acquisitions. Turning to more recent portfolio-wide trends. We are encouraged by the significant improvement we saw in business transient and group demand starting in the second half of September and continuing through October. We successfully transitioned from primarily leisure demand field recovery to a more traditional mix of leisure, business transient, and group demand across our portfolio. Based on preliminary results, October RevPAR was approximately $196, which was in line with October 2019 and 35% higher than October of last year. Occupancy was approximately 71%, and ADR was up approximately 13% over 2019. The pick up in business transient and group translated into higher midweek occupancy, with our portfolio consistently achieving occupancy greater than 80% on Tuesday and Wednesday nights in recent weeks. Now turning to transaction activity. In the third quarter, we entered into 2 separate agreements to sell 2 of our assets for a combined sale price of nearly $100 million. In late October, we sold Bohemian Hotel Celebration in Celebration, Florida, for $27.75 million or approximately $241,000 per key. We believe it was an opportunistic time to sell this hotel given its small size, the current investment appeal for the leisure markets, and a significant upcoming required renovation. We also entered into an agreement to sell Kimpton Hotel Monaco Denver for $69.75 million or approximately $369,000 per key. This transaction is expected to close before the end of the year. These 2 dispositions are consistent with our strategy of monetizing assets that we do not believe to be long-term strategic drivers for our company, while continually improving the quality and growth profile of our portfolio. We maintain a strong presence in both the Orlando and Denver markets with existing high-quality assets. And we may make additional investments in these markets if appealing opportunities arise, including through internal ROI investments, such as the comprehensive renovation we are currently undertaking at Grand Bohemian Orlando. Meanwhile, the nearly $100 million in proceeds will improve our already strong liquidity position and provide us with increased balance sheet flexibility. We initiated both of these disposition processes earlier in the year and are pleased with the pricing in both transactions, despite the recent uncertainty in overall economic conditions in general and financing markets in particular. On a combined basis, the sale prices for both properties equated to 15x 2019 hotel EBITDA and 17.1x trailing 12-month hotel EBITDA through September 2022. We believe that these are very attractive multiples, particularly in light of potential alternative uses for our capital. Going forward, we believe we are well positioned to remain opportunistic as it relates to potential on-strategy acquisitions, and we continue to evaluate a number of significant ROI opportunities within our existing portfolio that we believe could be meaningful drivers of earnings growth in the years ahead. With that, I will turn the call over to Barry, who will provide additional details on our third quarter performance and an update on our capital expenditure projects.

Thank you, Marcel, and good afternoon, everyone. For the third quarter, our 32 same-property portfolio RevPAR was $159.06 based on occupancy of 64.2% and an average daily rate of $247.74. As Marcel mentioned in his remarks, the same-property portfolio RevPAR decreased by 2.6% in the quarter as compared to the same period in 2019. The quarter ended on a high note, however, with September same-property RevPAR growth of 2.7% compared to 2019. This compares to RevPAR declines in July and August of 4.1% and 6.5%, respectively, as compared to 2019. September strength was driven by a notable pickup in occupancy beginning in the middle of the month, consistent with expected seasonal patterns in business transient and group, and generally coincided with a marked increase in return-to-office and return-to-business travel. Overall, September occupancy of 67.2% was a post-COVID record relative to 2019, with occupancy down just 687 basis points. Of our 32 same-property hotels, only 4 achieved higher average daily rates in the third quarter of 2022 than they did in the third quarter of 2019. Average daily rates in the quarter increased by 15.6%. We are obviously pleased to see continued pricing strength and are optimistic regarding corporate and group rates, particularly as we achieve higher mid-week occupancies in a number of our urban and suburban markets, including San Francisco and Dallas, on Tuesday and Wednesday nights, providing significant rate compression opportunities. We continue to see significant continued rate strength in our resorts and our drive to leisure markets, with RevPAR for the quarter compared to 2019 up 41% at Park Hyatt Aviara, 34.5% at Kimpton Canary Santa Barbara, 31.8% at Royal Palms, 27.1% at Hyatt Centric Key West, and 26.8% at Hyatt Regency Grand Cypress. As Marcel noted, our business mix shifted after Labor Day to reflect more group and corporate transient business. In the quarter, our group business benefited from solid bookings and double-digit rate growth, resulting in group rooms revenue nearly fully recovered to the third quarter of 2019 levels. Our performance reflected healthy demand from corporate groups, particularly at our larger group-oriented hotels in Orlando, Scottsdale, San Diego, and San Francisco. We remain optimistic about the recovery in corporate transient business, which notably improved in September. This trend has continued to strengthen in October. RevPAR growth in the third quarter of 2019 remained significantly impacted at Marriott SFO down 29.2% for the quarter, and Hyatt Regency Santa Clara down 36.5% for the quarter. However, RevPAR compared to the third quarter of 2021 was up 90.9% and 158%, respectively. In addition, our managers continue to point to improving corporate transient business fundamentals and expect this trend to continue as negotiated corporate rates are still on track to increase in the high single or low double digits next year. Now turning to profit. Third quarter same-property hotel EBITDA was $52.2 million, an increase of 1.4% on a total revenue decline of 0.7% compared to the third quarter of 2019, resulting in 48 basis points of margin improvement. Hotel EBITDA margin grew modestly in the quarter and was impacted by a combination of several one-time and some ongoing factors, including labor and utility costs. Let me expand a bit on labor, which we believe will be an ongoing factor on the margin side for the foreseeable future. As we identified in the second quarter, we achieved somewhat outsized margin expansion as a result of seasonally high revenues, despite our managers' challenges in fully staffing our hotels. During the third quarter, our operations were successful in filling many open positions. We're able to staff up to meet the strong recovery in demand we have seen in September and October. Some of this labor was hired and trained by our operators early in the third quarter, which put pressure on margins as our hotels continue to return to a more normalized level of guest service and amenity offerings. While most of our hotels are operating at staffing levels between 90% and 95% of pre-COVID levels, increasing wage costs resulted in labor costs being nearly equal to 2019 levels in the rooms department, the largest operating department in our hotels, despite growing overall margin by just 48 basis points. Labor costs in the rooms department were generally well controlled, labor costs up to 0.3% compared to the third quarter of 2019 on a revenue decline of 2.6%. In the food and beverage department, labor costs were down 4.3% on a revenue decline of 2%. Fixed departmental staff increased significantly during the quarter, particularly in sales and marketing, where our hotels have been aggressively restaffing positions in response to significant increases in group leads. This resulted in a 9.2% increase in labor cost in the department for the third quarter compared to the second quarter. Our hotels also had success in bringing back personnel in their repairs and maintenance departments, resulting in a 5.8% increase in labor costs between the second and third quarters. Utility costs continue to increase and are typically much higher in the third quarter than in the second quarter within our portfolio. Total utility costs were 20.8% higher in Q3 than in Q2 and were 14.5% higher than the third quarter in 2019. Turning to CapEx. During the quarter and year-to-date, we invested $18.8 million and $40.7 million in portfolio improvements respectively. At Park Hyatt Aviara, the comprehensive renovation of the golf course that began in the second quarter is now substantially complete. We continued planning work on a significant upgrade to the resort's spa and wellness amenities, which will be branded as a Miraval Life in Balance Spa upon its completion early in the second quarter of 2023. At Kimpton Canary Hotel Santa Barbara, we finalized planning of the guestroom renovation, which is expected to begin in the fourth quarter of 2022 and be completed in the first quarter of 2023. The comprehensive renovation of Grand Bohemian Hotel Orlando was well underway, with renovation of all public spaces scheduled for completion in the fourth quarter of 2022 and the commencement of guestroom renovations in the second quarter of 2023. During the quarter, we substantially completed the renovation of bathrooms at Marriott Woodlands in Houston, including the conversion of bathtubs to walk-in showers in approximately 75% of the guestrooms, as well as the renovation of meeting space at Paramount Pittsburgh and meeting space at Royal Palms Resort. In the fourth quarter, we'll be renovating and reconfiguring suites of The Ritz-Carlton Denver, which will result in 3 additional keys to the hotel. During the quarter, we also worked on a number of projects to enhance the resilience of many of our assets, including the replacement of the deck outside the meeting space and above the restaurant as well as spa and repairs at Hyatt Centric Key West, completed a roofing and sealant projects at Loews New Orleans related to Hurricane Ida; restoration of the pool decks at Westin Oaks in Galleria; new exterior coating, sealants, and signage at Marriott SFO; replacement of the roof at Renaissance Atlanta Waverly; and we continue to work on a number of energy efficiency projects, including 6 chiller replacements that we look to complete in 2022. Finally, we continue our planning work on a comprehensive renovation of Kimpton Hotel Monaco, Salt Lake City, including the lobby, meeting rooms, restaurant and bar as well as the guestrooms, which will include converting tubs to showers in 35% of the inventory. This renovation is expected to commence in the second quarter of 2023. With that, I will turn the call over to Atish.

Thank you, Barry. I will cover 2 topics this afternoon. First, I will discuss our full year guidance. And second, I will review our balance sheet strength. As for the first topic, our full year guidance. Our full year guidance is based upon current business conditions and does not anticipate changes to the economic environment or any additional COVID-related impacts. Our same-property demand outlook is unchanged. As such, our same-property RevPAR guidance is unchanged from prior guidance at down 5% versus 2019 at the midpoint. As to adjusted EBITDAre, we currently expect to earn between $250 million and $258 million. Relative to prior guidance, our current outlook is $2 million lower on the bottom end, and $22 million lower on the top end. The current midpoint of $254 million is $12 million lower than prior guidance. The $12 million variance is primarily driven by 3 items, as follows: number one, same-property hotel EBITDA margins; number two, W Nashville; and number three, a combination of 2 factors, the sale of the Celebration Hotel and the impact of Hurricane Ian. I'll now get into more detail on each of these 3 items. First, on same-property hotel EBITDA margins. A few months ago, we had anticipated stronger margin growth in the back half. With second quarter margins up 365 basis points versus the second quarter of 2019, our expectation was for strong levels of margin growth in the second half. Relative to prior guidance, the change for same-property hotel EBITDA margins represents $7 million of the variance. The $7 million is driven by the items that Barry just discussed, in particular, higher hotel labor expenses as well as higher non-labor expenses such as utility costs. We are seeing this impact more acutely in some of our larger hotels, which are still in early recovery from the pandemic. The second item is lower earnings expectations for W Nashville, which is outside of our same-property set. We had previously expected to earn $15 million in hotel EBITDA during 2022. We now expect to earn $12 million in hotel EBITDA this year. So that is about $3 million of variance. The third item, which results in about $2 million of variance in total, is a combination of 2 factors: first, the sale of the Celebration Hotel last month; and second, the impact from Hurricane Ian. Hurricane Ian had a slight impact on revenues, including non-rooms revenues at 7 properties in our portfolio. It also resulted in higher repair and maintenance costs due to minor damage at the 7 properties affected by the storm. Next, I want to discuss the EBITDA guidance change by quarter. The variance is weighted more to the third quarter than the fourth quarter. In other words, of the $12 million variance to our expectations, about $8 million came in the third quarter; the remainder, about $4 million, is a reduction in our fourth quarter expectations relative to a quarter ago. The other items that we provided full year guidance on in this morning's release have not changed much since last quarter. Interest expense and cash G&A expense are unchanged. Our capital expenditure guidance is down $5 million and now stands at approximately $85 million. Turning ahead to our group revenue pace. Our pace for the balance of this year has dramatically improved. At the end of the second quarter, pace for the fourth quarter was down over 20% versus the same time in 2019. We had strong group production during the third quarter with lots of bookings made for near end dates. As of month-end September, our fourth quarter 2022 pace was about flat to pace at the same time in 2019. Group revenue pace for 2023 continues to improve as well. We, again, had significant booking activity during the third quarter, evidenced by our pace for 2023 increasing materially. At the end of the second quarter, 2023 pace was down 30%, and by the end of the third quarter, it was down 19%. Based on short-term booking trends, we expect that variance to continue to lessen. Group rates for 2023 are currently up almost 10% versus group rates at the same time last year. Our confidence in the long term is reflected by our recent actions on both our dividend and share buybacks. We have recommenced both paying a quarterly dividend and repurchasing shares. Recall that we were restricted from either activity until this past August. As to dividends, our Board of Directors declared a third quarter dividend of $0.10 per share. That level of dividend reflects an annualized yield above 2% on a full year basis. As to share repurchases, we repurchased nearly $2 million of stock in the third quarter and another $6 million in the fourth quarter to date. Our recent average repurchase price was approximately $15.25 per share. We had over $86 million remaining on our Board's share repurchase authorization. We expect to continue to utilize this tool to drive shareholder returns, and we continue to believe our stock price reflects a significant discount to value. Moving ahead to my second topic, our balance sheet. It continues to be strong in the following 4 ways: number one, our overall leverage is manageable. Our trailing 12-month leverage ratio ending September 30 was approximately 5x. Our leverage target is to be sub 5x net debt to EBITDA. We were running the company in the low 3x to low 4x net debt-to-EBITDA range pre-COVID. We are on a path to get back into that low 3x to low 4x range. In the meantime, we have significant cushion relative to our existing leverage covenant. Number two, we have a strong cash position. Cash at the end of the third quarter, pro forma for the sale of Celebration in October, was about $285 million. This equates to about $2.50 per share or over 15% of our current stock price, and that does not include proceeds from the pending sale of Monaco Denver. We expect to deploy this cash over time into value-creating investments, including internal and external opportunities for our own stock. Number three, we have no debt maturities until the second half of 2024. At that time, less than 20% of our total debt matures. We have good relationships with our lenders and ample time to manage or extend those maturities. And finally, number four, most of our debt is fixed. Currently, about 80% of our debt is fixed rate. On an annual basis, our current sensitivity to higher interest rates is about $2.75 million for every 100 basis point increase in SOFR. In terms of FFO, a 100 basis point increase in SOFR equates to roughly $0.02 of FFO. We will be looking to refinance or fix more of our debt over the next 12 months. To wrap up, the company continues to be well positioned for an extended lodging recovery. With ample liquidity and dry powder as well as a strong base of assets still poised for recovery, we are looking forward to the next several years of growth and demand. That concludes our prepared remarks today. And with that, we will turn it back over to Tia to begin our Q&A session.

The first question comes from Bryan Maher with B. Riley.

Thank you for those comments. Marcel, maybe you or Barry could give us a little bit more color on the extent of the weakness in August. Maybe what the causes were as you saw at maybe the segments? Was it more leisure, more business, more groups? Just a little more color there would be helpful.

Leisure demand remained strong for us in August. When comparing to 2019, we noticed that business travel did not meet expectations in August, as many individuals seemed to avoid extensive business travel until after Labor Day. It wasn't until the second week after Labor Day that corporate demand really started to pick up. This shift accounts for most of the difference we observed in September's growth compared to 2019, contrasted with the decline we experienced in August.

And then on the rate increases, we hear a lot in the media about people complaining about room rates and airfare rates. Are you seeing any pushback there? Or are people just complaining about it, but still paying?

We've heard from operators that there is very little resistance to rates at the time of booking. Clearly, guests may not be entirely satisfied with this situation. However, we believe that the increases we've implemented in the hotel segment are much more justifiable compared to what we've observed in the airline segment in many instances. A significant part of our strategy, which we've been discussing for nearly a year, has been to ensure that our hotels provide services and amenities that justify a higher rate structure. We believe this approach has set our hotels apart in various markets and contributed to their strong performance.

Okay. And then just last for me. When you think about everything we're reading in the press now versus 1 quarter ago, 2 quarters ago, impending recession, etc., when you look back at booking trends 3, 6, 9 months ago and you sit here today and you look out over the next kind of 3, 6 months, has there been any material change in kind of the velocity of bookings? Can you give us any color there? Is the consumer moving at all as far as you're seeing in the next quarter or 2?

The booking window for transient travel remains quite short. Typically, transient bookings do not have a significant impact now or in the past few months. However, on the ground, we are observing strong travel, especially midweek. Our daily occupancy trends indicate a return to a more traditional weekly pattern, where midweek days are outperforming some weekend days, which is expected as we enter fall. We have better visibility in the group segment, where we’ve had robust booking activity over the past quarter, significantly closing or eliminating the gap compared to 2019 for the fourth quarter. Moreover, we are seeing strong bookings for 2023 at solid rates, with minimal pushback on rate increases for both group and transient bookings. Our operators are also reporting encouraging news regarding negotiated rates for next year, with similar positive trends in rate growth. Overall, we are quite optimistic about corporate travel based on recent observations.

The next question is from the line of Michael Bellisario with Baird.

Marcel, just first question for you, just sort of in reaction to the stock price being down, I suppose. Did you contemplate or maybe why was there no pre-release or intra-quarter update to better align analyst and investor expectations as the quarter end progressed?

No clearly, where you're seeing some of the softness and what we reported and what we really focused on today is a lot of what we saw really kind of towards the latter part of the quarter as it relates to the expense side of the business. And that's obviously a little harder to see in really short term than what you're seeing on the top line. So the top line for the quarter remained very much intact throughout the quarter with our expectations. We were also a little bit more surprised on the expense side of the business. And I think both Barry and Atish obviously went into a fair amount of detail there as far as what the challenges were on the bottom line side. So it was just something that, obviously, to us, also is a little bit more recent information, and that takes a little bit longer to work through and figure out what's going on with the top line.

Okay. Fair enough. And then one for Barry, just on the expense side. Were there any brand or market or regional differences in the margin pressures that you saw materialize in the third quarter?

Yes, definitely. In properties that have not yet recovered, there is a greater burden when operators add fixed staffing in areas such as sales, marketing, repairs, and maintenance. Specifically, the largest pressure on margins came from our biggest non-resort hotels, which are still significantly underperforming in terms of revenue. The operators and we recognized the need to have sales teams not just capturing leads but also actively selling to them. We believe that their success is evidenced by the improvement in booking pace for the fourth quarter and for 2023.

The next question is from the line of Dori Kesten with Wells Fargo.

With respect to acquisitions, how has your underwriting changed versus a few quarters ago? Just taking into account the higher cost of debt and potential recessionary headwinds.

Yes. Right now, our pipeline is not very extensive. We are constantly monitoring the market and evaluating potential opportunities. We believe it is wise to exercise some patience as we progress and gain better insights into the economic environment and asset pricing trends. Given the current state of financing in the hotel sector, we anticipate that more appealing opportunities might arise later. Therefore, we are adopting a patient approach. Additionally, we are mindful of interest rates and inflation impacts on both revenue and expenses. We're definitely assessing potential options but do not have a heavily filled pipeline at this time.

As you consider the next few years, do you anticipate a greater focus on the group sector? I'm curious about the 90% to 95% of full-time equivalents returning, yet you are still significantly lower in occupancy. Is this primarily about preparing your workforce in advance of business returning?

Well, when you examine the overall portfolio, that's what has occurred. To clarify a bit, the properties tend to fall into two categories. The ones that are nearly fully recovered in occupancy are at the 95% FTE level, while those that haven't fully recovered are closer to 90%, and slightly below 90% in terms of FTEs compared to 2019. We believe this is somewhat independent of group dynamics and more closely tied to occupancy. The main remaining factor is the variable labor associated with rooms expense and cleaning. Regarding fixed staffing for various property functions, such as sales and marketing or repairs and maintenance, the properties have reached relatively stable levels, and there aren't many open positions in those areas at this time.

The next question is from the line of Aryeh Klein with BMO.

In October, with business demand recovering, RevPAR was flat versus 2019 versus plus 3% in September. Why wouldn't there be normal above-normal seasonal growth in October? Is leisure dragging in any way relative to normal seasonality? Or is there something else going on?

No, that's a great question, Aryeh. We are very encouraged by the trends we observed in October, particularly regarding our midweek occupancies, which were significantly higher than in previous months. We are witnessing a recovery in business travel and an increase in group demand. The situation in October is somewhat unique, and we haven't discussed it much recently due to comparisons to low baselines. We are now returning to calendar changes. This year, October had five weekends compared to four in 2019. The additional weekend adds a Sunday, which typically has low occupancy. If we adjust for that, we actually saw positive trends in October, although the last weekend, with the extra Sunday before Halloween, was particularly soft, which impacted our average. Otherwise, we would have seen good growth for the month.

Okay. Got it. And then as you think about the margin profile of the business and where it was in 2019 and costs now coming back, have your views changed on the potential long-term improvements that can be realized?

We have discussed this topic frequently and addressed questions over the past couple of years. Unlike some others in the industry, we have always been cautious about making specific predictions on margin improvements. We recognize that we don't necessarily have a superior method of operating hotels more efficiently. However, it is undeniable that we are facing significant cost pressures, particularly in labor and overall hotel operating expenses. Despite this, we are pleased to report a 48 basis point improvement in margins compared to the third quarter of 2019, even in a challenging expense environment. We are indeed operating a bit more efficiently, but it is clear that inflation and cost pressures are widespread. We have always felt it was premature to assert that we would achieve specific margin improvements over time.

The next question is from the line of David Katz with Jefferies.

We've covered a lot of the issues I wanted to raise, but I did want to go back to just kind of the maturity flow taking a little longer term. There's a couple of mortgages, and then there's the bank facility that I think is a '24 thing. So we should start to see and hear some stuff about it next year. Is that about right? And how are you thinking about your strategies here?

Yes, thank you, David. We have a line of credit that is set to mature in the first quarter of 2024, and it remains undrawn. Additionally, we have $275 million in debt maturing in the second half of 2024, which we will begin to address next year. To provide some context, this debt represents about 20% of our total debt, making it relatively manageable. All of this debt is bank debt, and we maintain strong relationships with our bank syndicate, having made four amendments during COVID with their support. Regarding the $275 million, part of it is mortgage debt for a couple of properties that have performed well, and this debt is minimal compared to the value and yield of those properties. The remaining debt includes one term loan and an undrawn line. Altogether, we have $575 million in total capacity, but since the line is undrawn, only $125 million is associated with the term loan. Even considering the total of $575 million, it is quite manageable relative to our unencumbered assets, as 29 of our 33 hotels are unencumbered, amounting to roughly $3 billion in asset value. This is how the bank syndicate evaluates our bank debt against our asset pool, reinforcing our perspective that our situation is manageable. We've also received positive feedback from our banks during our ongoing dialogues, acknowledging that we have met all our commitments during COVID. We issued high-yield debt to pay off some bank debt and are viewed as a credible and stable credit, maintaining a manageable level of bank debt in relation to our company's size and unencumbered asset base. This summarizes our outlook on the maturities in 2024 and our overall balance sheet philosophy.

The next question is from the line of Tyler Batory with Oppenheimer.

This is Jonathan on for Tyler. First one for me, following up on the discussion of the business moving to a more normalized mix. Can you provide some additional color on the business mix now and how that compares to pre-pandemic and the potential upside that is made there as we move further along in the normalization process?

Yes, certainly. If you put together everything we've discussed, we believe we are generating more leisure rooms in our portfolio compared to 2019. Looking at Q3, revenue from group business has recovered, although room nights have not bounced back as much, indicating there’s still potential for growth in that area. The main area that remains lacking is the corporate transient segment. We've observed that smaller local businesses are traveling significantly more than they did during COVID. However, there are still substantial gaps with larger clients, such as the big four accounting firms and Fortune 500 companies, whose business is still considerably down. Nonetheless, properties have reported and weekly data shows that occupancy is improving, particularly on Tuesday and Wednesday nights, as those travelers are returning increasingly each week. Since mid-September, we've noted this trend, and ultimately, we are trying to assess how long it will take for the business to stabilize at its previous levels, which were relatively balanced across these segments.

Okay. Great. And then switching gears to the common dividend. Any additional details you can share in terms of what factors contributed to that decision? Why you think that level is appropriate? And I'm also interested in your perspective on potential payout ratios going forward. How do you think about the right payout ratio or the right level of quarterly payment today versus pre-COVID, given all the movements that have occurred in the portfolio?

Yes, sure. Thanks for the question. So in terms of dividend, the way our Board looked at this is that the business is recovering, and they view that this would be an appropriate level of dividend, given that we have sort of more visibility into the business and the demand has been strong. And our expectation is that, over time, our payout ratio would move to kind of a 65% level, which was where it was pre-COVID. So that's kind of the thinking right now that we return to that at some point in time. And our Board tends to revisit the level of the dividend in the future. So we'll obviously be updating you all on that as things move.

The next question is from the line of Bill Crow with Raymond James.

I wanted to discuss the situation in Nashville regarding the 20% miss on the first year underwriting. This is occurring before the new luxury supply arrives. How are you adjusting your long-term underwriting assumptions for that asset?

Yes. Well, I mean a lot of the supply already has hit at this point, and a fair number of assets have opened actually over the last number of months. So the bulk of the supply, we've actually seen coming in already. When we acquired the hotel, we talked about expecting about $13 million to $15 million of EBITDA for this year. As we got a couple of months into it, we were more comfortable that we thought we'd end up on the high end of that range, around the $15 million number. Fortunately, the summer was just weaker from both kind of the occupancy side, and we do think that that's really a matter of not really focusing on the right kind of segmentation mix, probably need a little bit more group than what we had on the books for this summer, which would have optimized the operations a little bit better. Also, some short-term issues as it related to optimizing the food and beverage facilities, we think that there's a lot of upside to be found there going forward. So if you look back at when we initially acquired, like I said, we expected about $13 million to $15 million this year. We're going to end up somewhere in the $12 million range. So clearly, a little bit south of where we thought and hoped it would be this year. But with everything that's still going on at the property, the focus that the team has, some of the changes that have been made at the operating team level as well, we think that our long-term thesis absolutely remains intact there. And we're very positive about all the developments that continue to happen in Nashville. So what we're seeing here really is, in our minds, kind of some growing pains, I would describe it. And we think that there is absolutely a lot of upside to come there, and we're very comfortable with that asset.

Are you able to clarify a bit more? I believe we've discussed the W brand and its attempt to rejuvenate. Now that the supply you mentioned has opened, do you think you're losing ground to other brands that have entered the market? And do you still have confidence in the W brand for the long term?

Yes, Bill, this is Barry. We definitely do. To clarify what Marcel mentioned, April and May were exceptional for this hotel, and October has also been a strong month. The property faced a shortfall in its group strategy during the summer months. Like many markets, this property relies on midweek group business, and they excelled in capturing that during periods of high demand and elevated rates, which explains the success in April, May, and October. The summer months were different, as the hotel adopted a rate strategy that aimed to maintain very high rates for midweek groups over the summer. Unfortunately, this led to mispricing, resulting in not being able to secure the desired number of group rooms during that season. It's a challenging situation to adjust quickly, but we are very optimistic about changing that strategy as we look forward to next year and anticipate months that may experience lower weekday demand.

I mentioned earlier that in October, RevPAR was approximately $320 at the hotel. This follows several new additions that you've referred to, which have opened in the market. Clearly, there is momentum, and we are very confident in those operations.

Yes. If I could just ask one more follow-up question. And maybe, Barry, for you. There's talk about the level of staffing driving the labor cost higher. But where are we on a rate basis? Are we still losing employees to other businesses and the $20 or $25 an hour sort of warehouse and retail workers? Or do you think rates have stabilized at this point?

We are experiencing significantly less loss of employees to other companies, according to reports from our operators. In most markets, the labor market has stabilized somewhat regarding wage rates, and people seem to recognize that the hotel industry offers a solid career path in a stable environment. There has been considerable focus at the property, management company, and national levels on promoting the hotel industry as a great career opportunity, highlighting that entry-level positions can lead to significant advancement. People appear to be more open to this perspective as the labor markets have generally tightened and opportunities in various industries remain available. That’s the feedback we’ve received from our operators, and it aligns with our experience in filling open positions at now relatively stable wage rates.

The next question is from the line of Austin Wurschmidt with KeyBanc.

I wanted to discuss the challenges in the Bay Area and Portland markets. Barry, you've mentioned how citywide and group demand have affected these areas. I'm interested in understanding how the group calendar is progressing specifically for these markets as we look towards the end of this year and into 2023.

I'll start in Portland first, where the convention center really is still just now having the first benefit of having a true headquarters hotel that they never had in 2019. So it's not a great comparison. Their bookings are up fairly significantly for next year, as are the hotels in-house bookings. And I think we're pretty pleased with how Portland has come online after the pandemic, and that location and the quality of the asset have proven their merit to a great extent. San Francisco, as I think you know, has a somewhat better year next year in terms of city-wide compared to 2019, and certainly compared to the last couple of years. But our property at the airport, to Marriott has really only benefited from that during true compression from really large events. And part of the strategy there for many years and certainly, part of the strategy going into next year has been for the hotel to really focus in on bringing in its own in-house group. It's got some very nice meeting facilities that have often been underutilized because the hotel had the benefit of so much great transient business historically, but the hotel is really making a pivot to do that. In Santa Clara, we're continuing the Bay Area since those are areas you focused on. Business in the Santa Clara Convention Center is weaker next year, but we have not historically driven a lot of business out of that center, which has really been relied much more heavily on local events and things like that. So again, that property has kind of doubled down on its efforts to be out there looking for a business that can be accommodated within the hotel. And again, all of that net-net is reflected in the booking pace we talked about for '23.

Yes, that's helpful. I recognize that overall, the booking trends for the group are improving, and I appreciate all the updates you've provided. Is there anything that concerns you about potential further improvement for next year, such as any select cancellations you've noticed or a decrease in the conversion rate of leads to bookings? Just anything you could share.

Yes, we continue to see group leads grow. To connect a few points from my earlier remarks and the Q&A, we've made a focused effort to ensure our operators have hired enough salespeople to handle the increasing business. Additionally, we are concentrating on bringing in more salespeople who are actively pursuing new business. We believe this strategy has been beneficial. Looking at the performance of our properties in terms of group business in Q3 and our current position in Q4, I believe this will significantly contribute to a positive strategy for the portfolio as we move into next year.

I would also say that the production that I talked about in the quarter was really remarkable. I mean, in the third quarter, the quarter bookings for the second half were up 3 times the level that they were in the third quarter of 2019. So we put a tremendous amount of business on the books. And group business continues to be very short term in nature. I would also say that rate progression is a big positive. If we go back to the end of the second quarter and looked at our pace for 2023, group rates were up about 4% or 5% by the end of the third quarter. Our '23 group rates were up close to 10%. So again, real positive from that perspective as well. And it's broad-based. I mean there are a lot of our big group hotels that are seeing good production. It's not a tale of only certain markets only having certain types of assets; the bigger hotels continue to move in the right direction.

The next question is from the line of Stephen Grambling with Morgan Stanley.

I think that we've been hearing about outperformance from some of the hotels with refreshes or renovations during the pandemic kind of across the broader group. I guess are you seeing any outsized benefits from these ROI projects that you've already done? And as we think about the ROI that's assumed on what you're doing in the future, any thoughts on how that may be similar or different?

The most notable example in our portfolio is what we accomplished at Aviara. I addressed this in my prepared remarks, but for that property to manage the impacts of COVID while we were in the midst of the project and already achieving a stabilized EBITDA level significantly higher than its prior performance is very encouraging. Moreover, we're not yet at stabilized occupancy with this asset, indicating substantial potential. This project is important for us because it was an asset that clearly required this type of ROI investment, and we identified the appropriate level of investment to make. When we acquired it, there were differing expectations regarding the investment amount, but we believe we made the right financial commitment to the hotel and are receiving the correct returns. It serves as a strong example of what we are considering within our portfolio, particularly when opportunities arise to enhance performance through appropriate investments.

I believe that the project which has greatly benefited from the post-COVID landscape is the new ballroom that opened at Hyatt Regency Grand Cypress at the end of 2019. While it has been challenging to quantify the impact due to the good but not fully recovered group business, we understand that during the most difficult times of COVID, having that additional ballroom provided significant advantage in terms of accommodating groups. Looking at the bookings for this year and into 2023 and beyond, having that second ballroom has been a game changer, allowing them to better handle in-house groups without being limited to just one. The property has performed exceptionally well this year, particularly on the leisure and transient side, partially because the hotel can increase rates when hosting two groups simultaneously in the two ballrooms. We also undertook a small project in 2019 to renovate the restaurant, which initially did not take off, but was further developed at the end of 2021 with celebrity chef Richard Blais, becoming a substantial attraction for both transient and group guests. We have seen substantial benefits and returns from our investments at this hotel and plan to replicate similar strategies in the comprehensive renovations discussed in our prepared remarks and earnings release.

Yes. And just to add one more comment. I would say, we do look at the returns on ROI projects. We underwrite all of that and feel confident in the level of returns, double-digit type returns that we're getting from these projects. And we're also looking at, after the CapEx, what's our overall basis in the asset as they compare to other assets in the market. So there are a few things we're looking at. We continue to feel good about the investments we've made in some of the projects that Marcel and Barry just talked about.

There are no additional questions at this time. I will pass it back to Marcel Verbaas for closing remarks.

Thank you, Tia. Thanks, everyone, for joining us today, and we look forward to seeing many of you over the next few weeks.

That concludes today's conference call. Thank you. You may now disconnect your lines.