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Executives

Jonathan Stanner - Vice President, Capital Markets and Treasurer

Raymond Gellein - Chairman and Chief Executive Officer

Diane Morefield - Executive Vice President and Chief Financial Officer

Analysts

Ryan Meliker - MLV & Company

Andrew Didora - Bank of America

Will Marks - JMP Securities

Lukas Hartwich - Green Street Advisors

Strategic Hotel & Resorts, Inc. (BEE) Q4 2012 Earnings Call February 28, 2013 10:00 AM ET

Operator

Welcome to the fourth quarter 2012 Strategic Hotels & Resorts earnings teleconference. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Jon Stanner, Vice President, Capital Markets and Treasurer. Sir, you may proceed.

Jonathan Stanner

Thank you and good morning, everyone. Welcome to the Strategic Hotels & Resorts fourth quarter 2012 earnings conference call. Our press release and supplemental financials were distributed yesterday and are available on the company's website in the Investor Relations section. We are hosting a live webcast of today's call, which can be accessed by the same section of the site with a replay of today's call also available for the next month.

Before we get underway, I'd like to say that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates, in addition to the management's beliefs and assumption.

Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings. In the press release and supplemental financials the company has reconciled all non-GAAP financial measures to the directly comparable GAAP measures in accordance with Reg G requirements.

I'd now like to introduce the members of the management team here with me today. Rip Gellein, Chairman and Chief Executive Officer; and Diane Morefield, Chief Financial Officer. Rip?

Raymond Gellein

Thank you, Jon. Good morning, everyone, and thank you for joining us on our fourth quarter conference call. This morning I'd like to summarize our strong operating performance for 2012 and then report my first 100-plus days as CEO, including my observations on our company from this new perspective, a recap of our strategic direction, an update on what we're seeing from a macro perspective and our outlook for Strategic Hotels in 2013. Following my comments, Diane will review the details of our actual fourth quarter and full year financial results, and provide earnings guidance for this year.

Yesterday we reported excellent operating and financial results. Comparable EBITDA grew 12% in the quarter, 13% for the full year. Thanks to steady gains in ADR, occupancy and RevPAR. RevPAR growth in our total U.S. portfolio was 7% for the year, which was our 11 consecutive quarter of RevPAR growth, and once again near the top-end of the metrics reported by our peers.

Our asset management platform is clearly best-in-class and consistently delivers with our brand partners operating results that outperform our peers in a portfolio level and at the individual hotel level.

As most of you know, I joined the Strategic Board in August of 2009 and became Chairman roughly a year later. And I was very involved in setting the strategy of the company from that point forward. Since becoming CEO in November, I've made it a top priority to be on the road, meeting with our hotel staff, hotel brands, joint venture partners, bankers and our shareholders. I've taken a deep dive into evaluating the strengths and opportunities at our hotels, particularly on the West Coast, where a significant portion of our assets are concentrated.

The headline is that my conviction is stronger than ever that this is a special company with an incredibly unique, irreplaceable and often iconic portfolio of assets that's truly differentiated in the public markets. And from my conversations while on the road, I know this view is widely supported.

Here are few of my specific thoughts and observations in the past few months. We are best-in-class in both the hotel portfolio and asset management perspective. I'm extremely pleased with the composition and quality of our portfolio and the results our team is generating. Even through the recession, we focused on wisely investing in our properties resulting in our hotels being in an excellent condition and now prospering during the recovery cycle.

While a number of initiatives were accomplished in 2012, the year is best highlighted by our completed renovations in Scottsdale and Miami. The new ballroom and meeting space at the Fairmont Scottsdale Princess has been enormously successful with group pace up 29,000 rooms or over 40% for 2013.

The InterContinental Miami with it's new high-tech look is quickly becoming one of downtown Miami's premier destinations for travelers and locals alike is evidenced by property level RevPAR increasing 15.6% and EBITDA increasing 29.1% post-renovations in 2012. As we look forward 2013, we expect RevPAR and EBITDA at the property to be at or near previous peak.

These improvements are just a sampling of the creativity and innovation that goes into our asset management strategy. Our team of experts drives valuable incremental revenue and cash flow from our asset, which translates to substantial enhanced value for our shareholders.

We will conservatively manage our balance sheet to continue to de-lever and improve our cost of capital. Our accomplishments over the past two years resulting in us reducing our net debt to EBITDA by over seven turn, shows how seriously we're focused on rightsizing our balance sheet. These pillars of our corporate strategy remain unchanged, yet as with any leadership transition, we will make some changes on the margin.

First, we remain committed to selling an asset to match fund the equity we funded on our line to purchase the Essex House last September. We intend to announce an asset sale in the first half of 2013.

Second, we'll explore disposing of certain non-core assets, such as the land development parcel we own in Mexico and the Lakeshore Athletic Club adjacent to the Fairmont Chicago Hotel for the same goal, de-leveraging and paying down our line of credit. We believe that once our line of credit is paid down, we will be appropriately levered with only asset level non-recourse debt with laddered maturities extended well into the future.

Last week we signed an extension of the ground lease at the Marriott Lincolnshire Hotel to extend the terminal lease to 99 years, which we believe add significant value to the hotel. There is a $5 million capital plan in place to upgrade the rooms. And once that's complete, we'll evaluate a potential sale of this non-core asset.

Third, in addition to asset sales, we will continue to de-lever through organic EBITDA growth. Fourth, we will selectively look to acquire assets that fit within our qualitative standards and meet the quantitative thresholds dictated by our investment policy and rigorous underwriting process. We believe it is strategic imperative to maintain the quality of our unique portfolio of luxury and upper upscale assets, and we commit to conservatively finance any acquisition we pursue.

You've seen successfully closed several strategic acquisitions over the past couple of years, including the two Four Seasons Hotels we bought from Woodbridge in exchange for stock, and the Essex House Hotel we acquired in a JV with KSL last fall. These acquisitions were done at attractive prices with creative structures and are proving to be accretive additions to our world-class portfolio of asset. We are optimistic that selective opportunistic growth opportunities are possible, but given the current market for luxury product, we will be very patient and cautious in our capital allocations.

Fifth, we will be disciplined and take a slightly more conservative approach to capital expenditure activities, while still keeping our assets in excellent physical condition. Owner-funded capital will be spent judiciously with a focus on core hotel upgrade such as room renovations as well as attractive ROI projects, many of which are nominal capital expenditures such as the very successful ENO Wine Bar concepts. And finally, we reiterate our diligent focus on maximizing shareholder value and will evaluate and act upon all opportunities that lead to that result.

Lastly, let me turn to the macro trends in our industry and the outlook for this year. 2013 is expected to be the fourth consecutive year of RevPAR growth. And while the current recovery has been fairly steady, it has been somewhat less robust than previous cycle. Our same-store RevPAR CAGR from 2009 through 2012 was 7.1%. To put that in context RevPAR growth for the luxury sector in the first three years of the two previous lodging recoveries at an average CAGR of nearly 8.5%.

The slightly robust nature at this point in the cycle is largely due to the more muted GDP growth, following the recent recession. We believe, however, this could change quickly with more robust GDP growth, if the country's fiscal policies are dealt with and corporate America loosens its spending restraint. Despite the slower nature of this recovery we're making steady improvements in our results relative to the previous peak, which generally was 2007.

Group room nights in 2012 were still down 16% from peak in '07 albeit at rates that were 2% higher. By contrast, transient room nights were up 8.3% relative to peak with rates 7% lower, reflecting the lingering impact for the downturn when we were forced to dramatically reduce rates to induce transient demand and makeup for the falloff in group demand. The upside of this though was that there is clearly runway for improvement in group demand.

On the labor front, fulltime equivalents at our hotels were 12% lower in 2012 than in 2008, despite occupied room nights being essentially the same. This is very good work by our team. We also believe this cycle has the potential to be longer than previous cycles, given the lack in new hotel supply over the past five years and the lack of a meaningful pipeline in the next few years, particularly in the luxury sector.

Interest rates remain at historic lows and the capital markets are robust, aided by a very open and even improving CMBS market. Many have suggested 2013 could be a year of increased deal activity as a result of all these trends. We believe these are all positive catalyst for asset values and bode well for the value upside of our 15 hotels. So 2013 is predicted to be another solid year for our portfolio. Yesterday we issued full year RevPAR guidance for our same-store portfolio by 7%, which will primarily be driven by increases in average rate.

Our first quarter softer year-over-year with group nights down 8% for the quarter, driven by weak citywide calendar in Chicago and a tough comparison for our Westin St. Francis Hotel, which hosted large non-repeat group in 2012. We also expect some displacement from renovation activity at the InterContinental Chicago and Loews Santa Monica in the first quarter.

Nonetheless, we remain optimistic about the remaining three quarters and the year overall. Group room nights for the last three quarters of the year, all up double-digits, and the full year definite group room nights are currently up 6.6% compared to the same time last year with rate up 3.9%, resulting in a 10.8% increase in group revenue. And approximately 76% of our budgeted group room night are on the books as of January 31, which is ahead of the past two years.

On the transient side of the business, we continue to be encouraged by the shifting out of lower rated discount channels into higher rated premium business, which was a common theme throughout 2012. And of course, new competitive supply remains extremely limited in our market.

So I'm very pleased by what I see and aside from rational caution regarding the macro economic environment. I'm very enthusiastic about the future for Strategic Hotels and our shareholders.

I'll now turn the call over to Diane to review our 2012 financial results and 2013 guidance.

Diane Morefield

Thank you, Rip. Good morning everyone. Yesterday we reported our fourth quarter and full year 2012 financial result. Fourth quarter comparable EBITDA was $44.7 million and comparable FFO was $0.06 per share.

In the fourth quarter of 2011, we reported comparable FFO per share of $0.11, which included a $10.7 million one-time gain related to our successful preferred equity tender, which we completed in December of that year. Excluding this gain, FFO per share would have been $0.05 per share.

For the full year comparable EBITDA was $175.4 million, a 13.3% increase over 2011. And comparable FFO was $0.26 per share, which is an 86% increase over 2011, when excluding the preferred tender gain.

Please note that our fourth quarter and full year comparable results exclude one-time charges totaling $29.1 million, including $18.8 million in impairment and other related charges, a $7.8 million charge related to the termination of the management agreement at the Hotel Del, and $2.5 million in severance charges, which I will discuss in more detail shortly.

RevPAR in our total U.S. portfolio increased 4.9% during the quarter with average rates increasing 3%. Transient rate increased nearly 4% as we continue to see a shift out of our low rated discount channels into our highest rated premium and negotiated channel, which were both up over 13% in occupied nights for the quarter.

Overall, transient occupied room nights increased 5.4%, which offset a 2.3% decline in group room night. Our decline in group room night in the fourth quarter was primarily driven by a softer than expected November, it appears to be just a one month bluff as group business recovered in December.

RevPAR growth was particularly strong in our resort portfolio with 5.3% growth quarter-over-quarter driven entirely by increases in average rate. EBITDA margins expanded 90 basis points year-over-year in the fourth quarter.

Capital projects at our Four Seasons Washington D.C. and Loews Santa Monica did cause disruption during the fourth quarter and lowered our RevPAR growth by approximately 120 basis points and our EBITDA margins by 40 basis points. So excluding this displacement RevPAR for our total U.S. portfolio in the quarter was 6.1% and EBITDA margins expanded by 130 basis points.

For the full year RevPAR in our total U.S. portfolio grew 7%, again weighted towards rate improvement with ADR of 4.9% in the year and occupied room nights up 2.3%. Occupancy growth was driven by increases in transient room nights which increased 4.1% over 2011. And again importantly, premium transient room nights grew nearly 30% year-over-year, while discounted transient nights declined 7.5%, which help drive a 5% increase overall in transient ADR.

Group room nights in 2012 were flat compared to 2011 but rates were 4% higher. RevPAR in both our urban and resort portfolio increased 7%. Total RevPAR increased 5.8% during the year as food and beverage revenue grew a strong 5.4% on minimal occupancy growth.

We continue to see signs of improved and flourished spending. For the year outlet covers increased 8.7% overall and 7.2% on a per occupied room basis. Our asset management initiatives to control property level operating expenses are yielding terrific results. For the year EBITDA margins expanded by 120 basis points and adjusting for certain one-time items our EBITDA growth to RevPAR growth ratio was over two times.

Four assets in our portfolio had RevPAR growth which exceeded 15%, led by the Marriott Lincolnshire at 15.1%. RevPAR to Four Seasons Silicon Valley grew 16% as the entire San Francisco Bay market is benefiting from the strength of the technology industry. The InterContinental Miami also had RevPAR growth of nearly 16% for the year as that hotel is benefited from our recently completed $30 million capital program including the upgrade of all 641 guest rooms, the opening of the new Richard Sandoval's Toro Toro restaurant and the technology driven enhancement of the hotel's public spaces and the building's facade.

We're encouraged by the early results of the JW Marriott Essex House which we closed in September in a joint venture with KSL. Our fourth quarter ADR was up over $30 compared to our original underwriting and January RevPAR was $35 higher than last year.

As expected our Four Seasons D.C. had a bit of a softer year in 2012 as a slower congressional calendar and off year for the very lucrative IMF Meeting and disruption related to our capital spending drove a 2.9% decline in 2012 RevPAR. However, we expect 2013 to be a much stronger year for the Four Seasons, which is already the beneficiary of the Presidential Inauguration, which occurred in January. Though this year's inauguration was slower for the city than in 2009, our average rate was still between 1,300 and 1,900 per night depending on the room product and are roughly rented out for $15,000 per night with a five night minimum stay.

Finally, our Four Seasons in Punta Mita finished the year with a 6.8% decline in RevPAR as the property continues to suffer from the security perceptions that have hampered travel to Mexico. Rip and Richard Moreau, our COO, just returned from a tour of this asset and report optimism that the environment for group business is strengthening and the asset remains in wonderful condition. We are cautiously optimistic that 2013 we will begin seeing signs of slow recovery in our results in Punta Mita and longer-term there is incredible upside in this asset.

Again, during the fourth quarter we recorded $18.8 million in impairment and other charges, $14.6 million of which is related to the impairment of 50 acre vacant land parcel know as the H5 development in Punta Mita, Mexico. The remaining $4.2 million is the write-off of prior period costs on certain capital projects that are no longer being pursued, primarily related to certain entitlement pursuit cost of the InterContinental in Chicago and the Ritz-Carlton Laguna Niguel.

In the fourth quarter we recorded a $7.8 million charge related to the termination of the long-term management agreement at the Hotel del Coronado, which was related to a broader restructuring of KSL's position in the del.

Strategic and Blackstone bought out KSL's equity position in the joint venture that owns the asset on the pro rata basis and we are now own 36.4% of the hotel with Blackstone owning 63.6%. In total, we contributed 12 million as our share of the equity capital and the requirement to terminate the hotel management agreement of KSL. This transaction is very accretive to the value of the asset and hotel earnings since the management fee under the hotel operating agreement has been reduced from 3% previously to 1.25%.

The reduction of the base managers' fee alone would have increased total EBITDA in 2012 by annually $2.5 million given the hotel generated over $135 million in revenue. KSL remains in place as the day-to-day manager of the hotel. However, the current management agreement cannot be terminated with a short notice period and no termination fee.

As Rip mentioned, we've also extended the maturity of the ground lease at our Marriott Lincolnshire for an additional 61 years and now have a full 99 year lease. Our annual rent payment will be $1.25 million and is indexed to inflation going forward. For reference, over the past seven years our ground rent payment has averaged $1.3 million annually, so this is an attractive long-term lease that adds significant value to the hotel.

From a balance sheet perspective, we currently have a $156 million outstanding on our line of credit and an additional $18.2 million in letters of credit leaving us with over $125 million of available capacity on the line. At the end of the year, we had $80 million in unrestricted cash predominantly at the various hotel level and two encumbered assets. Our only debt maturity this year is at the Marriott London Grosvenor Square, which matures in October and we are in discussions with the lender to refinance this debt.

Turing to guidance. We project comparable EBITDA for 2013 to be in the $195 million to $210 million range, an increase of 11% to 20% from our reported 2012 results. Comparable FFO is projected between $0.33 and $0.40 per share, which represents between 27% and 54% increase from 2012. Same-store North American RevPAR is projected to increase between 5% and 7% this year and total RevPAR between 4% and 6%.

EBITDA margins are expected to continue to expand between 75 and 125 basis points. Our same-store portfolio for 2013 includes all assets in our North American portfolio with the exceptions of the Hotel del Coronado and Fairmont Scottsdale Princess which are unconsolidated, and the JW Marriott Essex House which we purchased in September of last year.

Corporate expenses are forecasted to be between $21 million and $23 million. The mid-point of which is a 10% reduction from our 2012 run rate of approximately $24.3 million, that number excluding the VCP, the severance in the Essex House transaction costs that had to be expensed versus capitalize.

Capital expenditures are expected to be in the range of $65 million to $70 million in total, including $35 million of the hotel level contractual funding for FF&E and remaining $30 million to $35 million represents owner-funded capital projects, which we are considering based on projected returns, potential displacement and other factors.

The owner-funded projects that are currently underway included approximately $10 million rooms renovation in the North Tower of the InterContinental in Chicago. The continued facade work at the Loews Santa Monica, a room update at the Ritz-Carlton Laguna Niguel, the JW Marriott Essex Tower and two ENOs at the Westin St. Francis and Four Seasons D.C.

Our guidance includes displacement related to certain of these projects reducing RevPAR growth by approximately 100 basis points and our margin expansion by 30 basis points, which is reflected in our guidance range. Interest expense is forecasted to be approximately $95 million to $100 million, including approximately $10 million of non-cash interest expense. Note that there is no acquisition disposition or capital raising activity assumed in this guidance.

With that we would now like to open the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Ryan Meliker with MLV & Company.

Ryan Meliker - MLV & Company

I had a couple of quick questions I was hoping you could answer me. First, with regards to asset sales, can you give us any color? I know that, I guess it was almost six months ago now that you were talking about selling Jackson Hole to fund your portion of the Essex House. Is that still going forward, or are you reevaluating and looking at other things? Where do you stand on London assets, et cetera? That would be helpful.

Raymond Gellein

As we've said we commit to announcing an asset sale during the first half of this year. We stood back a little bit on Jackson Hole. And I want to take a look at the portfolio overall. So we're evaluating those assets and you should hear reasonably soon about our decision on which asset to sell. But we're committed to do that so that we can pay down the amount of the equity we put in the Essex House and pay down the line of credit. So we're in process on that one.

Ryan Meliker - MLV & Company

And you said this year you are expecting that process to go through the remainder of the year, or do you think something or you'll have identified the asset you want to sell fairly quickly and put it on the market, and close something in the first half of the year? How is that timeline going to look, I guess? And probably why I question because obviously there is a lot of things that have gone on over the past six months within your company, but you know, it's been six months since the Essex House transaction without a source of those funds yet?

Raymond Gellein

What we've said is that we'll announce which asset that we will sell by mid-year and we'll close it this year.

Ryan Meliker - MLV & Company

And then the other question I was hoping you guys could at least provide some color on, since your opening remarks didn't really talk about it, you obviously had a very local investor recently. Can you tell us how you feel about the value of some of your assets, as Laurence in the past always defined as irreplaceable assets, that there are buyers out there that wouldn't necessarily buy based on a cap rate or necessarily economic means. How deep is that market today, and are those assets that you're considering selling?

Raymond Gellein

Well, we've said it that we were going to sell one asset and we concur with the fact that we have a very valuable unique luxury and upper up scale portfolio, and we concur with the fact that it's very valuable and we concur with the fact that our share price today is as not reflecting in that asset value, that we believe is there.

But we believe that we are doing all the right things today to enhance the value of that portfolio. We think that we're in the middle of a good recovery that's going to last for a good while longer. There is good upside in these assets. And we believe that overtime the value of these assets will be realized. So that's the plan and we're sticking to it.

Ryan Meliker - MLV & Company

I agree with you, I think that the values obviously will recover, and will continue to grow as we move forward. But I think one of the questions that I've always had, and I have spoken with Diane about this it in the past, and I'd be curious to get your impression, Rip, is we've seen trophy-oriented assets sell at sub-three cap rates, from The Plaza in New York to the JW Grosvenor Square, real close to your property in London, to now the Park Lane on the block end in that 4% or lower cap rate. You think the public markets will ever give you the value that those assets would get in the private market?

Raymond Gellein

We actually have seen some of our peers, obviously, not at this really high level asset but we've seen some of our peers' trade at what we believe is close to or maybe even an access of net asset value. So I think it remains to be seen. I mean we've seen the transactions that you've seen. We believe that speaks very well to the value of our portfolio. And we'll be evaluating overtime that question. But I think it goes to the value of what it is that we own. And so we see a good deal of upside going forward.

Operator

Our next question will come from the line of Andrew Didora with Bank of America.

Andrew Didora - Bank of America

A question on fundamentals here. We've heard some conflicting views just on overall F&B spend this earnings season. I guess when you look at your group business, how does the current outside the room-spend now compare to this point in the last cycle? And is there anything you can do as owners to maybe help stimulate this spend a little bit more?

Diane Morefield

Andrew, let me give you a few statistics on F&B trends. Our total North America F&B revenues were up 5.2% last year and our total North American banquet revenue per group room was up about 2.5%. And so we're seeing increase in F&B, but overall our food and beverage revenues is still about 7% below peak.

Alternatively, our outlet covers which obviously is our restaurants and a lot of that is driven by the upgrades we've done to various restaurants in our hotels with named chef that rose 6% last year. So we're seeing great trends in F&B, regarding total spend in group room nights, so again it's still below peak. And a lot of that is more the ancillary spends, the spas, the golf those type of things that were more tied to incentive groups versus the corporate groups that predominate our group business today.

Andrew Didora - Bank of America

Just my last question, you went into a little bit of detail on the charges you took in the quarter, but can you maybe give a little bit more color in terms of the capital projects that you eliminated, what types of projects were these? How long were they kind of in the hopper, and were these eliminated after Rip's review of the assets?

Diane Morefield

We obviously have a capital spend project, for instance, the two predominant ones that were written-off was the InterContinental Chicago. Before the recession, there had been pretty deep dive analysis done to see if we could potentially replace the North Tower with a high rise condominium tower. So we had incurred zoning costs, planned designs and things like that. We continue to capitalize that until we made a decision that we would not likely go forward with that.

We're actually spending about $10 million in a room renovation for the North Tower of the InterContinental. It's obviously a highly profitable hotel for us between the two towers. So it made sense at this time to write that off. We also had some zoning and plans that we capitalize for an expansion, some additional rooms at the Ritz-Carlton Laguna Niguel. Again, we don't think we're going to do that imminently, so it made sense to write it off.

Operator

Our next question will come from the line of Will Marks with JMP Securities.

Will Marks - JMP Securities

You mentioned the first quarter being a little bit weak, with a pick up the rest of the year. Should we see RevPAR growth still within the range? Do you think you can beat last year's $0.02 of FFO? I think that was the number?

Diane Morefield

Some of these trends are similar in every year, which quarter is our obviously stronger for us versus not as strong. So as we said, we've given 5% to 7% overall guidance. We would say that second and third quarters will be higher growth for us than the first and fourth with our first quarter being the weakest.

We mentioned in our formal remarks that citywides in Chicago in particular are down and the weather in the first quarter in Chicago is particularly appealing, so probably not surprising. And then again, the Westin St. Francis, there is just a very larger group that that comparable is gone for this year. So the RevPAR growth is going to vary quarter to quarter, but we're very comfortable with the annualized range.

Will Marks - JMP Securities

And then I guess, on the group, can you remind me where we are grouped as a percentage of your total revenues? How much is it?

Diane Morefield

Last year it was about 43%, transient 57%. We're projecting a very similar split in 2013. As you know in peak, it was closer to 50-50, so we're hoping over time that it gets back to that but again it's around 43% this year.

Will Marks - JMP Securities

And then how much at this point, how much of that would be on the books right now and approximately what rate versus last year?

Diane Morefield

For our budget for the year between 70% and 75% is actually definite room nights on the books as of now.

Will Marks - JMP Securities

And then what kind of rate growth versus last year?

Diane Morefield

The rate growth is about 5%.

Will Marks - JMP Securities

And then last question, this has kind have been answered but I think it goes with the first questions that were asked, you talked about dispositions but does it really make sense to buy anything right now. And you said you're looking and you have to get a good deal but why not just stick with your very good current quality portfolio and maybe shed one or two.

Raymond Gellein

As the market heats up, right, we'll be very particular but it wasn't that long ago that we bought the Essex House and we were able to structure it in a really creative way. We are active in terms of looking at what's coming to the market but we will be very disciplined and we appreciate your point of view, which is that we've got a great portfolio. And A, we would only buy assets that would fit within the portfolio; and B, we would only buy them with some fairly stringent underwriting criteria and yield that would qualify. So we'll be careful, we promise.

Operator

Our next question will come from the line of Lukas Hartwich with Green Street Advisors.

Lukas Hartwich - Green Street Advisors

Rip, can you talk about your levers you think you can pull to help turnaround Punta Mita?

Raymond Gellein

No. As already Diane said, Richard and I just came back from Punta Mita and I was actually quite impressed and optimistic. I mean, clearly, Mexico was coming back. So airlift in Cancun, airlift in Cabo are back big time, airlift in Puerto Vallarta is not back quite as strongly but the experience that I had going down there, suggested that, Puerto Vallarta's airports has been renovated and looks good. The experience being transported to the resort is good. And the asset is in wonderful shape and group that was there the asset was almost full when we were visiting, in the group that was just leaving, rebooked for the following year.

So the experience is great. One other thing that we're looking at there is enhancing our meeting space, which we think we can do very cost effectively and pretty quickly to accommodate slightly larger groups. So we'll be looking at that. But we believe that we've turned the corner. We'll see how quickly that happens but this is a wonderful asset and I think it's still operating at 40% of peak or something like that. So we've got big upside here as the world comes back and people begin to trust going to Mexico.

Operator

This concludes the question-and-answer session for today. I will now turn the call back to, Rip, for any closing remarks.

Raymond Gellein

Thank you everybody. Thank you for tuning into our fourth quarter comments. We're excited about the coming year. We're excited about the quality of our assets. We're excited about our team. We're excited about the future. We'll talk to you next quarter. Bye.

Operator

We thank you for your participation. You may now disconnect. Have a great day.

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