Xenia Hotels & Resorts, Inc. (XHR) Q2 2024 Earnings Call Transcript

Hello all, and welcome to Xenia Hotels & Resorts Second Quarter 2024 Earnings Conference Call. My name is Lydia, and I will be your operator today. After the prepared remarks, there will be an opportunity to ask questions. I'll now hand you over to Aldo Martinez, Manager of Finance, to begin. Please go ahead.

Thank you, Lydia, and welcome to Xenia Hotels & Resorts second quarter 2024 earnings call and webcast. I'm here with Marcel Verbaas, our Chair 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 performance. Barry will follow with more details on operating trends and capital expenditure projects; and Atish will conclude today's remarks with commentary on our balance sheet and outlook. 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 yesterday afternoon, along with the comments on this call, are made only as of today, August 2, 2024, 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 income and definitions of certain items referred to in our remarks in our second quarter earnings release, which is available on the Investor Relations section of our website. The property-level information we will be speaking about today is on a same-property basis for all 32 hotels unless specified otherwise. 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 morning to everyone joining our call today. Our portfolio delivered meaningful RevPAR growth in the second quarter as we continue to benefit from improvement in corporate transient and group demand in many of our markets, offset by some weakness in leisure demand as the quarter progressed. We also continue to make significant progress on the most impactful project in the history of our company, the transformational renovation of Hyatt Regency Scottsdale. This project continues to be on track from a timing perspective, and the excitement is starting to build as we near the completion of most of the major components of the renovation and the relaunch of the property as the luxury Grand Hyatt Scottsdale Resort. Despite a continued strong focus on expense controls by our operators and asset management team, our hotel EBITDA margin in the second quarter was a bit lower than we had projected. This lower margin, combined with RevPAR growth that was slightly below our forecast, caused our adjusted EBITDAre to come in approximately $2 million below our internal estimate for the quarter. This was offset by a tax benefit positively impacting adjusted FFO that Atish will highlight in his remarks. For the second quarter of 2024, the company's net income was $15.3 million. Adjusted EBITDAre was $68.4 million, and adjusted FFO per share was $0.52. The renovation disruption at Hyatt Regency Scottsdale continued to be a substantial headwind in year-over-year comparisons. As a resort, it delivered particularly strong results in April and May of last year before the start of the renovation project in June. Year-over-year comparisons will become significantly more favorable as the year progresses, now that we have started lapping the commencement of the renovation. Same-property RevPAR for our 32-hotel portfolio increased by 1.8% for the quarter, while RevPAR increased by 5% when excluding Hyatt Regency Scottsdale. For these 31 hotels, occupancy increased by 389 basis points while ADR decreased by 0.5%. RevPAR growth was driven by strong results at our newly renovated Grand Bohemian Hotel Orlando, Canary Hotel Santa Barbara, and Hotel Monaco Salt Lake City. Additionally, we continue to achieve encouraging results at a number of our large group-oriented hotels, such as our three Houston hotels, Park Hyatt Aviara, Fairmont Dallas, the Ritz-Carlton Pentagon City, and Hyatt Regency Santa Clara. On a same-property basis, second quarter same-property hotel EBITDA of $73.4 million was 7.5% below 2023 levels and hotel EBITDA margin decreased 238 basis points. Excluding Hyatt Regency Scottsdale, second quarter hotel EBITDA increased 1.2% and hotel EBITDA margin decreased by 100 basis points. The increase in occupancy, slight decrease in ADR, and a mix shift in food and beverage revenues contributed to the margin decline for the quarter in comparison to last year. Our portfolio demand segmentation continues to revert towards pre-pandemic levels. With group and corporate transient demand recovering and leisure demand softening a bit during the quarter. Same-property group room revenues, excluding Hyatt Regency Scottsdale, increased 5% as compared to the second quarter last year. Corporate transient demand continues to strengthen, as evidenced by increases in midweek occupancy. Turning to our capital expenditure projects. We now project that we will spend between $125 million and $135 million on property improvements during the year, an increase of $5 million compared to our prior estimate. This is driven by an increase in the Scottsdale project as we have opted to add and accelerate some exterior upgrades. We now expect to spend $70 million to $75 million on the Scottsdale renovation in 2024. We still anticipate full completion of the project, including the ballroom and pre-function phase expansion, by the end of this year. However, we expect to complete the vast majority of the renovation by the end of the third quarter. We have made tremendous progress on the project over the past several months and continue to do so during the seasonally slower summer months in the Phoenix Scottsdale market. After completing the spectacular new pool complex and exclusive beverage amenities earlier in the year, we are now also nearing the completion of the guestroom renovation, with almost 90% of the guest rooms having been renovated to date. The remaining guestrooms are still expected to be completed by the end of the third quarter, after which our room count will have increased to 496. The renovation of the public space, including the lobby, lobby bar, hotel markets, and all indoor and outdoor dining spaces, is also progressing as planned, and we also expect to complete these components by the end of the third quarter. We remain particularly excited about our collaboration with Chef Richard Blais on the restaurant concepts and menus, as we believe that the upgrade of food and beverage offerings at the resort will be extremely well received by resort guests as well as local residents. Given the expected completion of all the aforementioned components by the end of the third quarter, we expect that the resort will be relaunched as the Grand Hyatt Regency Scottsdale Resort in early October. By that time, the resort will be fully functional and highly attractive for our anticipated higher-rated leisure and group segments. With the completion of the ballroom expansion and a limited amount of exterior upgrades to follow by the end of the year, we have increased our estimate of renovation disruption on our adjusted EBITDAre in 2024 by $1 million. While the renovation will continue to displace a significant amount of revenue and EBITDA during the third quarter, this disruption will largely be eliminated in the fourth quarter, as the impact of the ballroom expansion on the overall operations of the resort is expected to be minimal. We are thrilled to be nearing the completion of this significant project and continue to be very excited about the earnings growth potential that we expect we will create through this transformative renovation and rebranding. Turning to transaction activity, we previously disclosed that subsequent to the end of the second quarter, we sold the Lorien Hotel & Spa in Alexandria, Virginia for a sale price of $30 million. While this is a relatively small transaction, we were pleased with the execution of the sale, with the price representing a 21.3 times multiple on hotel EBITDA for the 12 months ended May 31, 2024. We believe that the successful sale of this hotel at this attractive pricing and the ability to use the proceeds in a more accretive manner with a prudent capital allocation decision for the company is reflective of the value embedded in our portfolio. We will continue to exercise patience as we evaluate any further potential dispositions and possible acquisitions to drive shareholder value in the years ahead. Meanwhile, we remain pleased with the overall quality and diversification of the portfolio and our internal growth potential. While we don't expect meaningful shifts in the composition of our portfolio in the near term, we will continue to look for opportunities to enhance our portfolio's quality and earnings growth potential if market conditions are conducive to it, as we have done throughout the history of our company. We intend to continue to manage our balance sheet prudently as we evaluate these potential growth opportunities. Looking ahead to the second-half of the year, we are taking a slightly more cautious stance compared to our expectations last quarter. We estimate that current same-property RevPAR increased approximately 2.6% in July as compared to the same period in 2023. When excluding Hyatt Regency Scottsdale, we estimate that July RevPAR is up approximately 1.9% compared to last year. Despite these positive top line results in July, we have slightly reduced our estimates for adjusted EBITDA for 2024 as compared to last quarter. This is reflective of both our recent operating results and greater uncertainty regarding our portfolio and market performance in the second-half of the year. Atish will provide additional detail on our updated guidance during his remarks. Despite short-term uncertainty, we remain optimistic regarding our portfolio performance and earnings growth potential as we look ahead to 2025 and beyond. We continue to expect that embedded growth in the portfolio will be a significant driver for future outperformance, particularly as the Grand Hyatt Scottsdale Resort ramps up. Importantly, supply growth is anticipated to remain muted in the luxury and upper upscale segments in our markets over the next several years. I will now turn the call over to Barry to provide more details on our operating results and capital projects.

Thank you, Marcel, and good morning, everyone. For the second quarter, our 32 same-property portfolio RevPAR was $185.69, based on occupancy of 71% at an average daily rate of $261.5, an increase of 1.8% as compared to the second quarter in 2023. Excluding Hyatt Regency Scottsdale, second quarter RevPAR was $191.28, an increase of 5% compared to 2023. This increase reflected a 3.9-point occupancy gain and a decline of approximately 0.5% in average daily rate as compared to the second quarter of 2023. As Marcel indicated in his remarks, the same property leaders in terms of RevPAR growth in the quarter include our hotels that underwent comprehensive renovations in 2023: Canary Santa Barbara, Grand Bohemian Orlando, and Monaco Salt Lake City. Collectively, RevPAR of these hotels was up 42.3% in the second quarter. Additionally, RevPAR grew significantly at our two hotels in Dallas, collectively up 19.4%; Ritz-Carlton Pentagon City up 14.3%; Park Hyatt Aviara up 11.1%; Waldorf Astoria Atlanta Buckhead up 10%; Westin Oaks and Galleria up 9.6%; and Hyatt Regency Santa Clara, up 8%. The growth in these markets is a result of clearly improving business transient and group demand that we're seeing across the portfolio. Markets that experienced RevPAR weakness compared to the second quarter of 2023 include New Orleans, Orlando, and Nashville, while Savannah and Key West experienced softer leisure demand. Despite softening in the Nashville market due to new luxury supply absorption, our W Nashville continues to perform well relative to this new supply, despite announcements of several of those properties. We do not expect them to be online for many years. Future group bookings are strengthening, as evidenced by record group booking production month in June. In the second quarter, business transient production was up nearly 90% in room nights compared to the second quarter last year. In Portland, our Hyatt Regency at the convention center continues to perform at a share level significantly above the remainder of the market due to its unique location and has continued to average occupancies in the upper 60% range. Looking at each month of the quarter and excluding Hyatt Regency Scottsdale, April RevPAR was $200.77, up 6.1% from April 2023. May RevPAR was $193.81, up 7.7% compared to May 2023, and June RevPAR was $179.16, up 1% compared to June 2023. We continue to be optimistic about the recovery in corporate and group rates as we continue to achieve higher mid-week occupancies across the portfolio, particularly on Tuesday and Wednesday nights, where portfolio occupancies of approximately 80% continue to provide meaningful rate compression opportunities. We note that compared to 2019, excluding Hyatt Regency Scottsdale, Hyatt Regency Portland, and W Nashville, during the second quarter, daily occupancy still trailed by approximately nine occupancy points midweek while Friday and Saturday occupancies trailed 2019 by approximately three occupancy points. While this gap is somewhat disappointing, our continually improving performance in our corporate transient and corporate group driven hotels gives us confidence that we still have significant growth ahead as our hotels continue to close this gap. Business from the largest corporate accounts across our portfolio continues to lag significantly behind 2019, while corporate business from small and medium-sized accounts has recovered much more significantly. Again, recent performance in our corporate transient-driven hotels gives us confidence that we still have significant growth ahead. Group business continues to be a bright spot across the portfolio, where we continue to see a reversion of pre-pandemic patterns. For the second quarter, excluding Hyatt Regency Scottsdale, group room revenues were up just over 5% as compared to the second quarter of last year. This growth was split relatively evenly with room nights up 2.9% and an average rate of 2.4%. We see a continued trend in our mix of group business with association group business now recovering at a stronger pace than corporate group business and more bookings for future years than the current year. Now turning to expenses and profit. Second quarter same-property hotel EBITDA was $73.4 million, a decrease of 7.5% on a total revenue increase of 0.7% compared to the second quarter of 2023, resulting in 230 basis points of margin decline. Excluding Hyatt Regency Scottsdale, hotel EBITDA was $74.1 million, an increase of 1.2% on a total revenue increase of 4.6%, resulting in a margin decline of 100 basis points. This decline in hotel EBITDA margin for the quarter was a result of several factors. Excluding Hyatt Regency Scottsdale, home department costs increased nearly 8% over last year, primarily due to continued occupancy growth. However, this equated to just a 2.1% increase on a per occupied room basis. Food and beverage revenue growth slowed to just 2% during the quarter as association business grew significantly more than corporate business, impacting banquet revenues as food revenue grew while beverage revenue declined, putting pressure on overall F&B margins. Cancellation & Nutrition revenues declined 35% compared to last year, returning to normalized levels, also impacting margins. However, other operating department income, including parking, spa, and golf revenues was up 21%. In the undistributed departments, expenses in each of A&G, property operations, and utilities were generally well controlled with approximately 4.5% growth each, while sales and marketing expenditures were up over 10% compared to last year as hotels continue to grow their sales teams and see continued growth in expenditures on digital marketing efforts and loyalty programs. Turning to CapEx, during the second quarter, we invested $35.8 million in portfolio improvements, bringing our year-to-date total to $69.3 million. As Marcel discussed, we continued our significant work on the transformative renovation and rebranding of the Hyatt Regency Scottsdale Resort and Spa at Gainey Ranch and are pleased that the project continues to be both on time and on budget. Our increases to budgeted capital expenditures are related to work on the building exterior and façade, which includes both an expansion of scope and acceleration of timing in order to accomplish that work this year. We continue to be incredibly optimistic about how the hotel will perform post-renovation. The initial response from both leisure and group guests has only affirmed our confidence in our expected outcome from the substantial investment. We are seeing future group business being booked at meaningfully higher rates than the hotels achieved historically, with the average daily rate for group bookings for 2025 up over 20% from 2022. In addition, year-to-date group room night booking production for future dates is at its highest level since 2018. Much of this is the direct result of the expansion of the larger Arizona ballroom, which will allow the hotel to retain existing group customers as well as attract new group customers who otherwise could not be accommodated at the resort, and the spectacular guest experience being created throughout the resort. Initial response and feedback from the luxury traveling community, a key component of the hotel's refined business plan, has also been very strong, as this channel views the property as a completely new addition to the Scottsdale market that they are excited to introduce to their clients. Planned renovations are currently underway at two of our Texas hotels during the seasonally slow summer months, including renovation of the lobby and restaurant, relocation of the fitness facility, addition of a concierge lounge and upgrading the Heavenly Beds of the Westin Oaks Houston and renovation of the lobby and upgrading the Heavenly beds at the Westin Galleria Houston. Comprehensive renovations of the lobby and restaurant and creation of M Club at Marriott Woodlands Waterway will take place in the late summer and during the fall. In addition, we're making select upgrades to the guestrooms at several of our largest assets, including Hyatt Regency Scottsdale, Santa Clara, Marriott SFO, and Renaissance Waverly in Atlanta. We expect minimal disruption from these projects. We are also continuing with approximately $20 million of infrastructure and sustainability projects this year, including significant HVAC upgrades at Andaz San Diego, Vermont, Dallas, Marriott SFO, Hyatt Regency Santa Clara, Renaissance Waverly, and the Ritz-Carlton, Denver. We are excited about the work our in-house project management team has underway and will contribute to future growth throughout the portfolio. With that, I will turn the call over to Atish.

Thanks, Barry. I will provide an update on two items: our balance sheet and our 2024 guidance. As to our balance sheet, it continues to be a point of strength for the company. We maintain a significant unencumbered asset base and ample liquidity. Our next debt maturity is over a year from now, and we expect to address it well in advance. Our current leverage ratio pro forma for the Lorian disposition is approximately 5.2 times trailing 12-month net debt to EBITDA. As a reminder, our long-term target is a leverage ratio in the low 3 times to low 4 times range. We expect to move closer to that range in 2025 as the Grand Hyatt Scottsdale resort ramps up post-renovation. Turning next to our 2024 full-year guidance. Beginning with RevPAR, we have lowered our expectation for RevPAR growth by 50 basis points to 3% at the midpoint. Excluding Scottsdale, we are lowering our expectations for RevPAR growth by 25 basis points to 3.75% at the midpoint. Our lower RevPAR expectation is a combination of slightly lower-than-expected second quarter RevPAR as well as more muted expectations across the portfolio, including in Scottsdale. As to adjusted EBITDAre, we have lowered the midpoint by $5 million to $249 million. This reduction is driven by three items as follows: $1 million due to the sale of the Lorien Hotel in July, $1 million due to higher renovation-related displacement in Scottsdale, and $4 million due to lower RevPAR and its corresponding impact on margins. Half of this, or about $2 million, was in the second quarter, and the other half relates to our second-half forecast. These three items are offset by $1 million in lower G&A expense. As to the weighting of adjusted EBITDA by quarter, we expect the third quarter to be just under 20% of the year's adjusted EBITDAre and the fourth quarter to be in the mid to high 20% range of full-year adjusted EBITDAre. As to our adjusted FFO per diluted share guidance, we are reducing it by $0.005. We now expect FFO per share of $1.68. This is due to the change in adjusted EBITDAre being mostly offset by favorability in expected tax expense. For the year, we have an income tax benefit of $3 million versus prior guidance of a $2 million expense. The $5 million positive variance is due to the release of a valuation allowance on certain state-level income tax deferred assets. Our full-year capital expenditure guidance has increased by $5 million, and our interest expense guidance is unchanged. Apart from the formal guidance, we also want to provide some color on our outlook for the remainder of the year by demand segment. Business transient continues to drive this part of the recovery. Our negotiated corporate business is still very much in recovery mode, particularly in urban markets, and this is translating to recent increases in our second-half forecast for our hotels in Burlingame and Santa Clara, California, Houston and Dallas, Texas, and Philadelphia, each of which historically has done healthy levels of business transient. Next, the group segment continues to be strong while group revenue pace is up only about 1% for the second-half, excluding Scottsdale. This is primarily due to a tough comparison over a couple of months, which were quite strong last year. Second-half group rates are up over 2%, and our hotels continue to have strong near-term booking activity. For instance, in the second quarter, group revenue production for the third quarter was 5% higher than last year. As we look further ahead, group for 2025 is starting to shape up well. As is typical this far in advance, about one-third of our expected 2025 group revenues is currently on the books. Pace, excluding Scottsdale, is up in the mid-teens percentage range, and on pace, including Scottsdale, is even higher. Last, leisure demand continues to normalize, but there are properties and markets that are starting to maintain their business levels, such as Charleston, South Carolina and Mount Brook, Alabama. In other markets, which are ramping post-renovation, such as Santa Barbara. Leisure is not as large a part of our demand mix once we get past the summer, and leisure comparisons at our smaller hotels in key leisure markets get much easier starting in the fall. As to the expense picture, we continue to experience moderation in expense pressure relative to last year. Our second quarter margin was impacted by lower-than-expected ADR. The second quarter margin decline is the greatest quarterly decline we expect this year. We expect margins to be positive in the second-half driven by Scottsdale. And even excluding Scottsdale, we expect more modest margin decline of less than 25 basis points. Before I wrap up, I'll add that we continue to be well positioned for opportunities to evolve the portfolio in the years ahead. Despite the slightly softer top line outlook for this year, our current guidance for adjusted FFO per share reflects 9% growth over 2023. We expect our rate of earnings growth to further increase as we look ahead to favorable dynamics, including more limited new hotel supply, moderating expense growth, and further strengthening in business transient business and improved hotel demand, which drives the bulk of the company's profits. As we look ahead, we remain confident in the longer-term earnings power of the company. And with that, we'll turn the call back over to Lydia to begin our Q&A session.

Our first question today comes from Michael Bellisario with Baird. Please go ahead. Your line is open.

Good morning, everyone.

Good morning.

Barry, first question for you. Booking channels. What are you seeing with loyalty redemptions? What does any change there, maybe historically, tell you about demand and demand patterns? And is there any change in the loyalty bookings? Is that affecting RevPAR and margins at your hotels and across the portfolio?

Yes. Good question. So we have relatively few hotels that are significant redemption hotels. In those hotels, we are seeing lower redemptions this year than we had seen in the prior year. But one of the reasons we've continued to drive documents in those hotels is to ensure we're getting redeemed at the premium redemption rates. We've not received a lot of insight from the properties as to why redemptions are down. There's some conversation about people having used up a lot of their points historically, and our hotels that have been high redeemers continue to be high redeemers within their respective brand families.

Got it. I understand. I have a second question regarding the improved business outlook for the second half of the year in certain markets like San Francisco and Houston, among others. Can we explore that further? Which customers and industries are you noticing a pickup from, and how much of that is driven by rate versus occupancy?

Yes. We certainly continue to see growth in small and medium-sized businesses. In some of these larger markets, whether that's Houston or Dallas, San Francisco, and Santa Clara, we are seeing a more significant increase than we have historically in larger corporate accounts. This includes Fortune 100 accounts and the consulting and accounting firms that are showing greater growth than they have thus far in the recovery from the pandemic.

I mean, is that pickup that's primarily demand then, not just rate?

The pickup is primarily in demand. But again, where that business is coming in on Tuesday and Wednesday nights in particular, hotels were able to compress their corporate rate or non-large corporate account business. Last year, the increases we saw across the largest negotiated corporate accounts were not terribly significant. However, we rely on and look forward to the filling of more large volume account business that enables hotels to compress and drive rate from the non-negotiated accounts.

Thank you. That's all for me.

Our next question comes from David Katz with Jefferies. Please go ahead.

Hi, good morning, everyone. Thanks for taking my questions. I wanted to talk about leisure and the portfolio and some of the commentary; it does seem as though leisure, at least for the moment, is slowing. This may not bode well for an ideal opening in Scottsdale. Does it inform any sort of other strategies that you can pursue or any other deals that you can make, obviously thinking more disposition wise? Or anything you can do to sort of deal with or approach leisure slowing a bit?

Yes. Thanks for the questions, David. Our portfolio is very balanced, allowing us to play with all demand segments. As we've discussed in this call, we're seeing strength coming from the corporate transient and group side, offsetting some of the weakness we are witnessing on the leisure side. Looking at our leisure markets, as Atish pointed out in his remarks, we have a few markets that are holding up well on the leisure side, while others are seeing softening. For example, Orlando is a softer leisure market this year than last year. Some of that might be due to Universal opening up a new part next year, which typically drives demand into that year and results in a little bit of slowing going into that. That's not necessarily impacting us in Orlando. Our Grand Bohemian Orlando downtown is a corporate transient-driven hotel that is performing well after its renovation. The softness that we experienced in Grand Cypress was primarily due to some group business being down there rather than suffering from a pullback in leisure demand. The Scottsdale project is primarily about the expansion of meeting space. Historically, this has been a very group-oriented hotel, and we don't have concerns regarding leisure slowing impacting this significantly. We still feel confident about completing the renovation and looking ahead to next year. Regarding the rest of the portfolio, we continually evaluate our operations to maintain quality and earnings growth potential. We've balanced our portfolio not just into a leisure-only strategy; we remain focused on corporate transient and group business.

Understood. I'm not sure that I fully understand the outbound international versus inbound international travel. I had thought this summer would be a little better than it has turned out to be. Is there anything more to it than just the cost decision or the value of the dollar as you see it?

Yes. We see the same market data trends you do. Outbound international travel has been strong, and everyone was expecting that to be a bit weaker this year. Our portfolio isn't heavily driven by inbound international traffic. We have very few assets where that's a meaningful component. So while we notice the overall market trends, we’re not best positioned to take a strong stance on that.

Our next question today comes from Aryeh Klein with BMO Capital Markets. Please go ahead. Your line is open.

Thanks, and good morning. Maybe just following up on the leisure comment. From an out-of-room perspective, what are you seeing on that front? And beyond leisure, are there impacts elsewhere, whether it's group or business transient or anywhere else? Thank you.

Yes. I think specifically on leisure, we've been encouraged that outlets are still busy across the portfolio and that consumers, compared to pre-COVID, seem to be eating and drinking more frequently in the hotel. Our in-house capture in general across the portfolio is better than it was pre-COVID, partly due to pricing increases we've taken in restaurant and bar pricing. Overall, out-of-room spend, including ancillary areas like parking, spa, and retail in some of our properties, has held up very well, particularly in Q2, where we saw a 20% increase year-over-year.

Barry just highlighted a trend regarding the shift in group business mix, with associations outpacing corporate group business, which impacts the additional spend by those segments.

Thanks for that. And then just on the expense side of things. What has changed versus your prior expectations? It seems some peers are seeing softening on the expense pressure side. What’s the embedded growth for same-store expenses this year, and do you think that moderates as we look ahead to next year?

We do think it moderates, and Atish mentioned that we expect it to moderate for the remainder of the year. We're driving occupancy very well, which means we're servicing more guests. I feel much better when we look at the per occupied room expense growth as opposed to just raw expense growth. This is proof to us in part that much of this growth is occupancy-driven. Our strategy involves driving occupancy at a higher cost, especially in sales and marketing, where we have more salespeople on board across the portfolio and are increasing paid search and digital marketing efforts.

Thank you.

Our next question is from Jack Armstrong with Wells Fargo. Please go ahead.

Hey, good morning, everyone. Nashville had a tough quarter from a leisure perspective. Did we continue to gain market share in that environment? Are there any updates on the new restaurant concept there or any other out-of-route drivers?

Yes. No updates on the restaurant concept currently. We're working towards some pretty exciting ideas that we'll hopefully be able to share soon. For Nashville, we actually held up fairly well relative to the comp set despite the leisure challenges in Q2. We performed well in corporate transient, but faced a challenging time regarding in-house group business. We experienced turnover in the sales department leading into the second quarter and struggled to recover. However, we have seen production improve in June and early indications for July suggest we are on track for driving group business into the hotel. Our production is significantly more meaningful than initially anticipated in our underwriting.

Okay. That's helpful color. Based on your take on the macro environment and the slowdown you're seeing in leisure, do you assume stabilization of growth might be pushed out a bit? Or do you maintain your group booking pace for 2025?

We don't see anything that would cause us to change our view of stabilization. While leisure is an important component, group is crucial for building occupancy and benefiting from seasonal trends in specific markets. We don't have concerns regarding significant impacts on the completion of the renovation and subsequent results.

Hey, good morning. Thanks for taking my questions. I wanted to ask about the group business. I think you said you're pacing up 1% for the second-half. What are you seeing in terms of bookings for the quarter? Can you also discuss the citywide calendar in the second-half of this year?

Yes. I referred to production being strong in the second quarter and being up 5% for the third quarter relative to last year. We continue to see strong levels of near-term business. Although our pace numbers are up only 1% excluding Scottsdale for the back half of the year, we maintain confidence in strong booking activity and favorable rate profiles.

As discussed before, our portfolio is not heavily reliant on citywides. Some properties have seen decreases in Q3 and Q4 compared to prior years, but we successfully managed to perform well in Dallas despite citywide declines. The other markets have little importance for our load factors and we expect overall positive outcomes.

Okay. A quick follow-up on the leisure discussion. In terms of your channel mix, have you started using OTAs or other discount channels more to drive business? Is that impacting the cost structure?

In some hotels where occupancy is critical, we are using more OTA marketing than historically. This is a lower revenue, higher cost channel contributing to a minor impact on margin.

Okay. Lastly, I'm trying to project 2025 from an EBITDA perspective. Given the moving pieces like acquisitions and renovations, can you inform us about potential building blocks for EBITDA next year?

The components for next year are detailed in our previous investor deck. The Scottsdale project is anticipated to drive a $20 million increase in EBITDA between now and stabilization. Newer assets like W Nashville and Portland are significant growth drivers. Additionally, we expect strong recovery in several Northern California assets. As we get closer to next year, we will provide more specific details as budgeting progresses.

Thank you. We have no further questions. So I'd now like to turn the call back over to Marcel Verbaas for any closing comments.

Thanks, Lydia, and thanks, everyone, for joining us this morning. I know it's been a busy week of earnings calls in our space. We appreciate you joining us, and hope you enjoy the remaining summer. We look forward to updating you in the future.

This concludes today's call. Thank you for joining. You may now disconnect your lines.