Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

I would now like to remind everyone that this conference is being recorded today, August 4, 2023 at 12 PM Eastern time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir..

Thank you, operator, and good morning, everyone. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our filings with the SEC, which could cause actual results to differ materially from those projected.

We caution you to consider these factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO, and property level adjusted EBITDAre.

We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our second quarter results have been provided in our earnings release and supplemental, which are available on our website.

With us on the call today are Bryan Giglia, Chief Executive Officer; Robert Springer, President and Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer. Brian will start us off with some commentary on our second quarter operations and recent trends. Afterwards, Robert will discuss our capital investment activity.

And finally, I will provide a summary of our current liquidity position, recap our second quarter earnings results, and provide some additional details on our outlook for the remainder of the year. After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Brian. Please go ahead..

Thank you, Aaron and good morning, everyone. We are pleased that our second quarter adjusted EDITDA and adjusted FFO per share exceeded the high end of our guidance. Continued strong demand at our urban and convention hotels, combined with productivity gains, operating efficiencies, and expense controls led to increased hotel profitability.

The second quarter saw a divergence in trends across our portfolio as urban and convention hotels generated strong growth, while our resorts saw demand moderate as the quarter progressed. These trends reinforce our focus on May a balanced portfolio of high quality convention, urban and leisure hotels and resorts.

Following a very strong RevPAR performance in the first quarter, we anticipated that growth would normalize in the remaining quarters of the year as we lapped the impact of the omicron variant.

While strong domestic leisure travel accounted for most of the industry growth coming out of the pandemic, during the second quarter, demand increasingly shifted to corporate travel and group events.

In Q2, our urban and convention hotels increased occupancy by 460 basis points and grew rate by 4.2% as compared to the second quarter of 2022, which contributed to robust year-over-year RevPAR growth of nearly 11%. Once again, San Francisco led the portfolio, growing RevPAR by over 32% on further occupancy gains and higher rates.

While there's no shortage of negative press surrounding the San Francisco market, we remain encouraged by the hotel's ongoing recovery, and we continue to believe that the city is a desirable long term market in which to own a well located fully renovated hotel.

During the quarter, our hotel ran nearly 11 points of higher occupancy as compared to its competitive set as the property is able to capitalize on its more than 70,000 square feet of meeting and event space to create its own in-house group compression and not have to rely solely on the convention center and citywide events.

In addition, our fully renovated guest room product is allowing the hotel to drive higher rates and attract new and higher quality demand, which, together with better occupancy contributed to a 124% RevPAR index relative to competitive set in the second quarter.

We also saw strong growth at our hotels in Portland, Boston, and Orlando, which all generated double digit RevPAR growth in Q2. Hilton San Diego Bayfront had its best second quarter EBITDA performance on record.

The recent Comic Con in July was very strong as the hotel remained nimble and was able to resell all rooms that were canceled related to the Hollywood strikes at average rates that were nearly twice as high. In total, room revenue was up 10% relative to the Comic Con event last year, and our hotel led the competitive set over the multi day event.

As I noted earlier, the operating fundamentals at our resorts were less robust as domestic leisure destinations faced increased competition from US travelers going abroad without offsetting benefit of inbound foreign visitation.

This was particularly the case at our Florida coastal hotels, which were early beneficiaries of very strong pent up leisure demand coming out of the pandemic, but have seen some normalization as travelers opted for other destinations and vacation options that has been limited in the last two years.

Despite this moderation, our two Florida resorts maintain average roommates that were 46% higher than the second quarter of 2019. We also saw softer leisure trends in Napa and Sonoma as the wine country continued to be impacted by unseasonably cool and wet weather and the surge in international travel.

In Wailea, our hotel grew rate to another all-time second quarter record beating the high watermark set last year and a staggering 53% increase as compared to 2019.

Despite still garnering very strong rates, our resort portfolio underperformed our expectations, particularly in May and June, which contributed to 9 points of lower RevPAR growth for these properties as compared to our forecast at the start of the quarter.

While this trend continued into early July, we have seen some pick up in forward bookings over the last couple of weeks which is encouraging.

Overall, we think it is reasonable that this heightened preference by American vacationer for international travel will normalize as we move into next year as much of the pent up demand for trips abroad gets worked out this summer.

This should also be bolstered by increasing levels of foreign visitation to the US, which continue to recover, but remain well below pre pandemic run rates. Overall, the combination of steady corporate and group demand and a slower leisure backdrop contributed to 280 basis points of occupancy growth across the portfolio in the second quarter.

And when combined with generally flat rates, drove total portfolio RevPAR growth of 3.6% as compared to the prior year.

While room revenue growth was below the low end of our expectations, we were pleased to see that out-of-room spend remained strong and came in above forecast, benefiting from continued increases in group activity and increased ancillary revenues. Banquet sales per group room was $230 in Q2, which was above 2019 on a comparable basis.

Our urban hotel saw strong out of room spend with Marriott Boston Long Wharf, JW Marriott New Orleans, and the Bidwell Portland, all generating spend per group room above the second quarter of 2022 and 2019.

Including the robust out-of-room spend, our portfolio generated an additional $146 of revenue per available room in the quarter for a total RevPAR of approximately $392, an increase of 5.4% from last year.

As the demand environment evolves, particularly at our resorts, we are working with our operators to drive efficiencies and mitigate costs where possible. Wage growth has continued to ease as some of the excess pressures come out of the labor market.

Food and beverage costs also improved relative to the prior year, driven by a combination of easing inflation, menu optimization, and a higher mix of banquet business. As you have likely heard, the property insurance market for real estate of all types has been increasingly challenging in the recent years.

Late in the second quarter we completed the annual renewal of our insurance program that covers most of our portfolio. And while our outcome was more favorable than what I have heard from many others, we were not immune to rising costs.

Despite the various cost pressures, our total portfolio generated an EBITDA margin of 32.3% in the second quarter, which was only 100 basis points lower than a very strong second quarter margin performance in 2022.

Our urban and convention portfolio grew margin by 10 basis points year-over-year, even with 80 basis points of margin headwind from the Renaissance DC, which is in the final phases of its repositioning to the Western DC Downtown. Now turning to segmentation.

Our portfolio generated 240,000 total group room nights in the quarter, and the group segment comprised roughly 44% of our total demand.

Q2 group room night volume represents approximately 96% of comparable pre pandemic amounts with average rates 10% higher, leading to total comparable group room revenue that was 6% higher than the same quarter of 2019. For the total portfolio, group room rates were up 3% year-over-year with total room nights up 10%.

Group production for all current and future periods in Q2 was 221,000 room nights, resulting in a 7% increase in group revenue production relative to last year.

In terms of transient business, which accounted for 50% of our total room nights in the quarter, comparable rate came in at $324 or 20% higher than the pre pandemic levels we saw in the same quarter in 2019. For the total portfolio, the transient rate was $345 and was down slightly to the prior year, driven by softening leisure demand.

Partially offsetting the decline in leisure volume were increases in both average rate and room nights for our corporate negotiated channel, which posted revenue growth of 10% versus last year.

This is indicative of the ongoing recovery in business travel and is encouraging as it is the segment where we have the most opportunity to grow occupancy across the portfolio. While the second quarter RevPAR performance came in below expectations. We continue to see areas for optimism and expect full-year earnings growth in 2023.

The outlook that Aaron will discuss shortly assumes that the demand environment for leisure travel remain soft in the near term and while we have seen some encouraging data points in recent transient bookings, it is too soon to tell if it is indicative of a resurgence.

We will continue to monitor these trends at our resorts, but we expect that our well balanced portfolio of urban and convention hotels will make up a larger contribution of our earnings in the coming quarters. Lead volumes and group production are strong.

Group pace for the second half of the year is 6% higher than 2022, driven by increases in both room nights and average rates. The Renaissance DC is in the final stages of its transformation to the Western DC Downtown, which will be completed and rebranded during the fourth quarter and contribute to further profitability growth later this year.

Competition for international travel and inclement weather have combined to hamper the performance of both of our Wine Country Resorts.

While the fundamental backdrop has not yet been conducive to demonstrate the full earnings power of these assets, these are world-class resorts and we have conviction that our attractive basis in each will give us the ability to create value from these investments over time.

We remain focused on building the group base at these resorts, which will ultimately lead to transient rate compression. Record outbound international travel and lagging inbound visitation is negatively impacting domestic summer travel, especially at high-end resorts like these, as well as other domestic luxury destinations.

We are ensuring that our operators remain diligent in managing their operating models, so that when the transient leisure demand resumes, these resorts will be able to maximize flow-through and profitability.

Our low leverage well staggered debt maturities and ample liquidity gives us the optionality to continue to pursue our strategic objectives of investing in our portfolio, recycling sales proceeds into new growth opportunities and returning capital to our shareholders.

We are working through the final steps in the planning for the Andaz Miami Beach transformation and the model rooms have been completed. We will be sharing some exciting new details with you related to the project in the third quarter.

Robert, will discuss some additional updates on the other investments we're making across the portfolio that should provide multiple layers of growth in the coming years. While the transaction environment remains challenging, we retain significant investment capacity to deploy when opportunities arise.

And we are actively searching out ways to recycle capital. We remain committed to returning capital to our shareholders. And as you saw in our press release this morning, our Board of Directors has also increased our base quarterly dividend to better reflect the normalized taxable income our portfolio will produce over various cyclical periods.

And with that, I'll turn it over to Robert to give some additional thoughts on our renovation progress, as well as upcoming capital investments..

Thanks, Bryan. We started the year with several projects underway and I'm pleased to report that we have made substantial progress. The conversion of the Renaissance Washington DC to the Westin brand is in the final stages.

The rooms are largely complete and renovation work is now progressing in the lobby and fitness center along with some exterior work. The hotel is on schedule to be relaunched as a flagship Western property in October and will contribute to earnings growth in the fourth quarter.

Work is now also underway to convert the Renaissance and Long Beach to Marriott. As we shared with you before, we expect the Marriott flag will enable the hotel to better compete for business, grow earnings and ultimately increase the value of the asset.

The work will be substantially complete by the end of the year with a plan to relaunch the hotel under the Marriott brand in March 2024. As Bryan noted earlier, we have finalized the construction details and are preparing to begin work at The Confidante as the resort begins its transformation to the Andaz Miami Beach.

We will have additional details on the refined scope and timing later this quarter. While the transaction market remains challenging recycling capital continues to be a primary component of our strategy as we seek to harvest gains and redeploy proceeds into new growth opportunities.

We maintain considerable balance sheet capacity, which will allow us to take advantage of dislocation and opportunities that may arise as existing loans come due and as owners seek liquidity. With that, I'll turn it over to Aaron. Please go ahead..

Thanks, Robert. We continue to maintain a strong balance sheet. And as of the end of the second quarter we had approximately $164 million of total cash and cash equivalents, including $56 million of restricted cash. We retained full capacity on our credit facility, which, together with cash on hand, equates to over $660 million of total liquidity.

We have addressed all debt maturities through December 2024. And as of the end of the second quarter, our net debt and preferred equity to EBITDA stood at 3.6 times and our net debt to EBITDA was only 2.6 times. Shifting to our financial results. The full details of which are provided in our earnings release and our supplemental.

Our quarterly profits, which surpassed our expectations despite softer revenue growth, reflects steady corporate and group demand with a moderation in domestic leisure travel.

Adjusted EBITDAre for the second quarter was $85 million, which was just above the high end of our guidance range, driven by stronger non-rooms revenue and better margin performance across our urban and convention hotels.

We estimate that we incurred approximately $3 million of displaced EBITDA in the quarter, related to the renovation work at our hotel in Washington DC. Adjusted FFO for the first quarter was $0.33 per diluted share, which was also just above the high end of our guidance range.

While the evolving demand backdrop makes forecasting incrementally more challenging, based on what we see today, we expect third quarter total portfolio RevPAR will range from a decline of 1% to an increase of 2% as compared to the third quarter of 2022.

Based on this level of RevPAR, we estimate that third quarter adjusted EBITDAre will range from $57 million to $62 million and our adjusted FFO per diluted share to range from $0.18 to $0.21.

Based on second quarter performance and our outlook for the third quarter, we now estimate that full year RevPAR growth is likely to be near the low-double digit end of the range we shared with you on prior calls, which excludes our hotel in Miami that will soon be undergoing renovation.

Assuming this level of RevPAR growth, it could translate into a full-year adjusted EBITDAre range of roughly $255 million to $265 million.

Based on the current renovation timelines, we now anticipate that we will incur between $11 million to $13 million of EBITDA displacement in 2023, with approximately $7 million of that total already incurred during the first-half of the year, roughly $1 million expected in the third quarter and the balance in the fourth quarter as work ramps up with The Confidante in preparation for its conversion to Andaz Miami Beach.

Now shifting to our return of capital. We've repurchased a modest amount of additional stock in the quarter, bringing our year-to-date total to $21 million at an average price of $9.46 per share. A meaningful discount to consensus estimates of NAV and a compelling implied multiple on our earnings.

In addition to the repurchase activity, our Board has declared an increase in our base quarterly common dividend to $0.07 per share for the third quarter, a 40% increase over the prior amount.

While we continue to believe that our measured payout approach in the first three quarters of the year, combined with a catch-up dividend at year-end is well suited to our dynamic sector. We believe this higher base dividend amount better accommodate our commitment to returning more capital to shareholders.

In addition to the common dividend, our Board has also declared the routine distributions for our Series H and I preferred securities. And with that, we can now open the call to questions. So that we are able to speak with as many participants as possible, we ask that you please limit yourself to one question. Operator, please go-ahead..

The floor is now open for your questions. [Operator Instructions] Our first question comes from the line of Duane Pfennigwerth from Evercore. Please go ahead..

Hey, thanks, and good morning.

Just with respect to 2024, could you speak to the puts and takes on earnings growth and maybe margins into next year as we think about these ROI projects, assets that are ramping, and some of the displacement impact this year?.

Sure. Good morning, Duane. I'll start and then I can let Aaron cover some of the displacement puts and takes. So, when we look at next year, first from a group perspective, well, we're not -- we don't typically give group pace at this point. The pace is positive for next year.

So that's something that we'll continue as we -- as we've seen in the second quarter and expect throughout the rest of the year that those markets, the convention, the urban markets will continue to be strong next year. When you look at the citywide calendars in 2024, DC is very strong, New Orleans is strong, San Diego is strong.

And then when you look at DC, specifically we are completing the renovation in the third quarter of this year.

So there's some additional displacement that will happen during this quarter, although as we've said throughout the process because of the lack of availability in DC we've been pleasantly surprised with our ability to work around the displacement, work with groups to minimize that loss. And so, DC will start to ramp in the fourth quarter.

Now from a group perspective there is already quite a bit group business on the books and it's being sold as a Westin into next year. But from a transient perspective, the Westin flag will go out in the fourth quarter and will start booking from there. So we have that, we have that ramping up.

Our expectations on San Francisco is that, while the market has some challenges, we continue to utilize and take advantage of our meeting space and our ability to build on -- create group compression of our own and not have to rely on citywides.

And then the main renovation next year that will be happening will be in Miami, which demolition will start in the back half of this year. And then we will -- it will be under renovation for the majority of next year, looking to open up in the high season starting in December of next year.

I'll let Aaron go through kind of the EBITDA displacement puts and takes for both time periods..

Sure. So just to add to what Bryan commented on. As we noted earlier in the call, what we're expecting for this year is $11 million to $13 million of EBITDA displacement and that's split roughly kind of 50:50 between the first part of the year related to the work in DC, and then the back half of the year primarily related to the work at the Andaz.

So as we think about as we just moved from 2023 into 2024, I wouldn't expect much in terms of the way of earnings contribution on a full year basis from Andaz, just given the work that will happen in the back half of -- the first half of the year relative to the earnings that we will generate once it's done.

So that'll be a net headwind from a displacement perspective. The positive, I think that will have will be the renovation work at Long Beach that Robert had referred to and that conversion will take place early in the year. So we should see some lift there. And the primary driver will just be the Westin DC Downtown, coming online as a fully flagship.

Westin should be a significant contributor for us..

Okay. Thank you..

Thank you..

Our next question comes from the line of Chris Sterling from Green Street. Please go-ahead..

Thanks, good morning. Going back to the [Multiple Speakers] Good morning, guys. Bryan, going back to The Confidante, could you offer any updated thoughts on the return profile there.

Just given some of the recent trends we've seen in that market? I know you've spoken to conservative underwriting in the [indiscernible], but would be helpful to hear any update [indiscernible]..

Sure. Yes. So for -- it’s numbers that everyone has seen for last quarter and probably going into third quarter, this year too. The Miami market has definitely pulled back and has moderated still substantially, higher than what it was in 2019, but a little lower than where it was in 2022.

Quite frankly we've seen that and I think others have talked about it too in most of the higher-end leisure market, domestic leisure markets. I won't be the first one to say this. But there's a lot more international travel happening than inbound international travel happening. We see that coming from the higher segments.

And so, the top destinations are definitely feeling some of that moderation in Q2 and Q3, Miami, is absolutely not immune from that.

But when we go back to our investment here, the game plan followed a lot of what we did in Wailea and I'd say we have an asset in a fantastic location mid-beaches become a very high-end destination, the model is under construction just the block down. You have [indiscernible] you have the addition.

And so, it is definitely the right zipcode much like Wailea was. We have an asset that has a fantastic footprints as far as the campus size and the ability to create a backyard destination. And so that's a big positive. And so, when we look at the opportunity here, the opportunity is to draft.

And while 2023 is down in the market, 2022 finished substantially higher for the -- for that market than where we had underwritten. And that way we can -- even with the pull back the amount of room that we have is even more than we initially thought. So that all bodes very well.

What we're also doing with the property, I think we're finishing up -- we finished the model room, backyard demolition will happen soon, we're working with some various partners that we'll be able to announce shortly.

And so sometime in the quarter, we'll be able to provide a full picture of what this asset is going to look like and what the resort will look like going forward. But what we have we think is a -- is going to be an exceptional room product, a fantastic food and beverage environment and a great pool experience.

And a couple of things we've done with the rooms too is that, we're making some modifications to make sure we have the right suite counts, to make sure that we have the right product offering for that market. And so, while all leisure markets have had some big wins and some pullbacks, Miami is no different.

But where we are, where we ended -- where the market ended last year and where we need to position this hotel, we feel better about it than we did when we executed the transaction..

Understood. Thank you..

Our next question comes from the line of Smedes Rose from Citigroup. Please go-ahead..

Hi. Thanks good morning out there. I wanted to ask you, it looks like the -- it looks like the pace of share repurchase slowed in the second quarter.

And I'm just wondering kind of how you're thinking about that going forward? Or are you just kind of trying to preserve capital here with your upcoming CapEx budgets?.

I think when we look at share repurchase, we will look at return of capital to shareholders, that's a combination of dividend and share repurchase and we did increase our dividend, our base dividend to more accurately address what our current structure is and what our current taxable income is to minimize the catch-up dividend, as much as possible knowing that that's a difficult thing to do in our space.

And so, when we look at allocating capital going forward, it really is just is a continued balance of what we've been doing. It's making sure that we have the right amount of capital for investing in the portfolio future acquisitions, whether that comes from using balance sheet capacity or recycling capital and then repurchase.

And while -- yes, it did slow a little bit and sometimes you get into -- you get into blackout periods where you have to set certain parameters as far in advance. I think when you look back at 2022 and into 2023, we've been -- for market cap size of these we want to be more aggressive when it comes to share repurchase.

We have a fantastic balance sheet, we have plenty of capacity. And so, like you said, it really is just balancing everything. But, again, when our share price gets to certain level, we definitely have the capacity to go ahead and buy back..

Thanks. And then, can I just ask you on the Napa properties, you mentioned, I know for a number of reasons it’s probably been underperforming your expectations.

I mean, do you think is it 2024 where you sort of start to realize better value there or do you think it's more like 2025 for the managers to get the kind of group business that you were talking about on the books that would cause some compression on the transient side..

Yes. It's definitely later than we initially thought. And that's actually absolutely disappointing. But when we look at both of the resorts and they open close to each other several months apart.

But when they both opened up, they both had, it was in 2022 when you had the pent-up domestic leisure demand that was really just through the roof and both hotels out of the gate did very well from a leisure standpoint.

And as we've talked about before, we got a little bit overly confident in that leisure demand and didn't do a good job of putting on the group base. Last year, we corrected that and have the hotel's focus more on group base going into this year. And Four Seasons actually has fantastic group base in Q3 of this year.

And so that has been fixed in will be fixed going forward. But now with the strong group base the leisure demand has fallen off for all the reasons that has been mentioned on several of the calls. And so, we haven't had the hotel's firing on all cylinders yet.

And usually when you have a newly opened hotel what you'd like to do is, get the revenue up to where you want it to be and then you go. And you work the cost model to make sure that the profitability is in there.

While since we've seen the various components of the revenue side just not working at the same time, we're now actively working with both of the management teams with the highest levels of both of those organizations working through fine tuning that cost model.

And Montage maybe a little bit ahead of Four Seasons where even in the second quarter where you saw revenues were kind of flat, you saw a little bit more profitability in the prior year. So you're starting to see the beginnings of that.

Now, remember, these are luxury assets and so it's very important that we balance the customer experience, the service levels with our desire to have the right profitability.

But we believe that there is plenty of opportunity here, rightsizing and working through the cost model, working through different staffing and the way that things are done where we can extract significant margin upside without impacting our guest experience. And so, that's something that's underway now.

Now, what we will need is, we'll need for leisure side to come back to reaccelerate. And if we can get into that next year, we're working the group base side is a continuation and will continue to be working through that. When the leisure comes back, we'll start to really see that.

Our expectation and -- time will tell, is that, a lot of this international travel will get out of the system this year and we should revert back to a more normalized leisure demand as we get into next year. So yes, you should start to see some additional earnings acceleration next year.

Other things that are happening for the properties, [indiscernible] continued to make some enhancements in Montage, Four Seasons, our winery there, which is, again, it's a resort inside of a winery with everything the vineyards and all the components of a winery surrounding it. So it's quite a unique experience, so our winery is doing very well.

We're actually looking for profitability this year and then another thing for the Four Seasons, which is a huge win is the restaurant or there was recently awarded Michelin Star.

And so, everything is starting to really -- as far as recognition from the winery recognition from the restaurant, Four Seasons, obviously, is as a well-regarded premier luxury operator. So it has the components right now if everything kind of lines up.

We have the revenue, we have the expense plan and when this ramps up, it's going to start putting off the [Technical Difficulty]..

Okay, thank you. Appreciate it..

Thanks. Smedes..

Our next question comes from Chris Woronka from Deutsche Bank. Please go ahead..

Hey, good morning guys. My question really kind of relates to the Hyatt San Francisco. I know you provided some color in the prepared comments. But, obviously, it's an outlier relative to everything we see in San Francisco. There is reasons for that you mentioned, but how steady is that demand.

I mean, is that a function of other things going on with other hotels in the market? Is this some kind of contract business? I'm just trying to get a sense for what that could look like later this year and even next year if the office vacancies continue to rise..

So, San Francisco is and what we're seeing in the market now are, the submarkets are performing differently. And being in Embarcadero, in the financial area, we rely and have for several years now relied a lot less on the citywide compression and conventions. It would have to be a very large convention for it to really get out to us and impact us.

And so, what the hotel is focused on is, we have good meeting space, we have a lot of meeting space relative to the size of our hotel and so to use that to go after groups that are 10 to 100 room nights is really the kind of the bread and butter, 100 and 200. But groups that need the space that are would be a much smaller groups somewhere else.

And so, we're able to do that, we're able to then compress the transient demand and while the office vacancies are not where anyone would want them to be, they are -- we are surrounded by office.

And so, there are companies that back-to-work certain days and with our new rooms product that we did and maybe we have some companies that are -- that were staying at a higher price point hotel previously. But we are able to capture good corporate business that we couldn't get before with the room product that we had.

And so that's what really the secret to the success for this hotel is now. The transient demand is strong, is strong for the rest of the year. We anticipate meaningful EBITDA growth and EBITDA probably double this year over last year, but we're still quite -- we’re down quite a bit from 2019.

And so, it's a -- to your question, is it a sustainable model that we have there? Yes, it is, because -- is there some crew and some other things? Yes, there is that in the hotel.

But we do have a good model, a good location and in a market that's suffered and certain segments of it and sub-markets of that will continue to suffer some of the products getting a little worn down there. And so we have a basically brand new product that we're offering guests. And so, the hotel is really well positioned.

Does that give it legs of growth for next year? It should have some growth -- it should continue to grow next year. But what we will need is, we need to continue -- for the market to continue and to get more people into the city. The good news is, especially in our location, the city looks a lot better than it did previously. So look, we're optimistic.

We think we have the right hotel in the right location. But it's still a long road ahead for San Francisco..

Okay. Thanks, Bryan. Appreciate all the color..

Our next question comes from the line of Michael Bellisario from Baird. Please go ahead..

Thank you, good morning guys. I could go back, you mentioned 9 point shortfall in resorts in the quarter. Couple of parts here.

How much of that was occupancy, how much of that was rate? And then the pickup that you mentioned in forward bookings over the last couple of weeks, was that broad-based? Specific to any properties? And then, what did the rate look like on those bookings? Thank you..

Okay. So let's start -- we'll start with resorts in the quarter. Second quarter was mainly -- a good piece of it was -- the majority of it was occupancy. ADR was down, but not as much as the occupancy. And as we look in the third quarter and July, specifically we'll see some more -- we'll see some more rate deterioration.

And where we're seeing that is really -- it's a question of is -- I think it was asked one of the calls yesterday, is this just demand or is it demand or in rates getting cut.

And the answer is, it's a little bit of both, but on the rate side what we're seeing is of the leisure segments it's the retail segment that was the weakest in Q2 and the weakest in Q3. And maybe just to simplify that retail segment, that's the brand.com customer.

We think that that's the customer that is more likely the one taking the international trip now. And so, while that customer has gone away in the leisure segment, we're not seeing that in the BT or other segments, but if that customer has gone away for the short term, our expectation is that they come back.

And so, the occupancy and rate mix is more a function of the retail customer going away and more wholesale, more discounted channels, more OTA that you would have typically had. On the BT and the transient pickup over the next -- those are bookings over the next six months. That's being heavily led by our urban assets.

And so the -- San Francisco is a big piece of that. Portland has actually picked up some Boston Long Wharf even San Diego, where some of that is -- you'll have government or government-related a lot of lot of defense contractors, aerospace, that sort of thing.

So -- and then Log Beach is another one where we're seeing a lot of pickup on the government and contractor side..

Great. Thank you..

Our next question comes from Dori Kesten from Wells Fargo. Please go ahead..

Hi. Thanks. Good morning. I believe back in June, you mentioned the potential to increase the total cost of the Andaz renovation. I think it's from 60 to 70.

Is that still being considered?.

So we are in our final stages of finalizing everything. So what we're going to do is sometime in the third quarter when we -- and really what's holding this up now is just finalizing our partnerships to announce because we want to -- we want to provide a complete picture.

We will update both the costs, any scope changes, where the final room count is going to be, who the food and beverage operators are going to be and then provide some photos and the renderings of that. And then on any scope changes, we'll update our projections to include returns on those scope changes.

So I'm kind of dancing around your question right now, and I will say that we will have a more wholesome update during the quarter. That said, the construction costs have increased over that time period -- over this time period, while shipping is really the only thing that has come down.

So normal inflation in the expense side should be expected, but we'll provide a total view of everything. And I think once everyone sees the opportunity, see some of the name brand recognition that we'll be able to bring to the Andaz, it will be pretty exciting..

Okay.

Are you able to put a little finer point around what the potential displacement could be for next year for that project?.

I think if you look to what we said for this year, before we were able to get the timing and everything down is that we said that we would be close to zero this year. And I think the hotel is going to put off about $5 -- $4 million to $5 million of EBITDA. And so -- and it did $12.5 million in 2022.

And so looking at 2023, the majority of your earnings comes in the first quarter or so of the year than the very end of the year. We plan to be open for the end of the year, but it will probably be minimal earnings coming off that hotel next year..

Sorry, the last part kind of broke up.

You said your earnings next year should be comparable to this year?.

It will be minimal earnings from the hotel next year..

Okay. And then just last one.

Based on what you all are working on today, would you expect to be recycling capital by year-end?.

We are hopeful to be able to recycle capital by year-end. Part of our plan is to be able to the active recyclers of our real estate. And when we get to the point at which we're done with our investment by cycle of these hotels, it's time to move on to something new. It's been challenging up to this point.

Smaller deals, obviously, easier to be done than larger deals. We have recently seen several CMBS deals get done for larger assets. So larger cash flowing assets are now at least financeable. And so that should help things move along. But we are absolutely endeavoring to be able to hopefully get some recycling done this year..

Okay. Thank you..

Our next question comes from Bill Crow from Raymond James. Please go ahead..

Hey good morning, guys. Trying to make this quick. I have three quick ones. One is, yes or no. We'll start with that one. Do you have any asset -- and this is following up from Dori's question.

Do you have any assets currently on the market?.

We have -- and normally, we don't talk about deals until we are done, but we -- I will tell you, we always have at least one asset in some form of either marketing, soft marketing or in talks with others..

Okay. I appreciate that.

Bryan, I guess when I looked at your results last night, I was surprised the RevPAR miss relative to your guidance that was provided at month end, and I get that it's a resort driven, is that -- was that a failure of kind of in the quarter, for the quarter, demand to materialize? Was there cancellations in there? What -- I'm just trying to figure out what the miss was..

So cancellations are pretty static to where they were. They're up a little bit to 2019, but that's more a function of DC, where we have group contracts, and we're under renovation. And so, some of them we are able to work it out with the groups and some of them we’re not.

And so I think probably from a total dollar amount, maybe up $800,000, $900,000 to where we were in 2019 in cancellations, but that's predominantly DC. It's to your first point. It's a -- there is short-term visibility that you have on transient demand.

And in certain markets and Wailea was one of them was -- we had some -- we had shortfalls in Q1 and then we opened up certain channels and they filled. And Q1 was fine. It was great.

When we got into second quarter and starting really kind of accelerating in June -- in May and June is that, those bookings didn't -- were not happening like they happened in Q1. And when we look at the different markets and it tends to be the higher end and luxury leisure domestic markets.

And when you go you can look at our portfolio, you can look at others that have given them or if look at the STAR data it's the higher end markets. It's the Florida coastal at Southern California, Northern California and Hawaii, domestic Hawaii, call it. I know Hawaii has inbound from Japan that it benefited from.

And so, it was the typical pickup started to slow down. And that coincided with this imbalance between international outbound and inbound travel..

Thank you for that, Bryan. And that's the third question I wanted to ask, because it came up, I know on host call and I asked Jim a similar question, but we've been tracking this inbound outbound differential for more than a year, it's not getting much better. You made a comment that you hoped that this would kind of normalize by next year.

But we had three years where people weren't able to travel internationally.

So I'm curious why it might normalize that quickly?.

We are seeing international airfare become very expensive. And then I just -- there was an article amount yesterday to showing that domestic airfare has come down a little bit. And so while it tends to be the more affluent traveler that's doing these types of trips. The cost of that international ticket does weigh on the overall cost.

And so -- and then that in our European trips, something that people do every year or every couple of years. So look, you're absolutely right. It's the time for visas and other things to get into this country has been difficult inbounds.

Prior to the pandemic, we did about 10% international business, and it's kind of hard to calculate because our hotels may do 10%, but maybe the markets that we're in have compression from more that starter other places and we're half of that now. And so China is a piece of that, especially on the West Coast. European inbound is a piece of that.

I mean even in Wailea, the biggest international is Canada, and we've seen a decline from that. So the airline fares are probably the one thing that gives us a lot of confidence that once that -- because that's what we see, when we see the prices of fight to Hawaii go down, we see demand go up. And so -- but we'll have to watch it..

Appreciate that. Thanks for the color Bryan..

Thanks, Bill..

Our final question comes from the line of Floris Van Dijkum from Compass Point. Please go ahead..

Hi. Thanks, guys. Encouraging progress in the wine country and San Francisco. My question has to do with the dividend.

Again, you raised the dividend, what would the dividend have been raised to if you did not have any tax loss carry forwards?.

Well, we're -- the dividend right now, that decision was independent of our tax loss carry forwards. Now we have substantial carry forwards. And our plan is to use those for our capital recycling. To make it so we'll have -- as we sell hotels, we'll have gains.

You can always take care of that through a 1031 exchange, but that sometimes timing needs to be on your side for that. So by keeping our NOLs to shield those gains, if we’re unable to do a 1031 that allows us to be more efficient with recycling that capital.

So right now, what the increase today was when we came out of the pandemic and taxable income started to flow back in, we went back to our previous dividend, which was based off of a different portfolio, based off of a different capital structure, based on the different depreciation.

So all these factors are we just kind of went back to what we were doing.

As we look forward and wanting to maintain a dividend that can handle normal cyclical fluctuations and minimize the amount of a catch-up dividend at the end of the year, this was a step, maybe a little overdue step that could have happened earlier this year, but this is a step that we needed to take.

We still anticipate and we'll have an update next quarter. We still anticipate to have a catch-up dividend at the end of the year. This will not -- Q3 and Q4 dividend will not take care of that full taxable income. But we'll have more information on that, projections on that and then views on the base dividend going forward on our next call..

Thanks. Appreciate it..

I would now like to turn the call over to Bryan Giglia for closing remarks..

Well, thank you, everyone, and thank you for the interest in the company, and we look forward to meeting with many of you at upcoming conferences and investor meetings. Have a good day. Thank you..

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect..