Sunstone Hotel Investors Management Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 8.11 | About: Sunstone Hotel (SHO)

Sunstone Hotel Investors (NYSE:SHO)

Q3 2011 Earnings Call

November 08, 2011 12:00 pm ET

Executives

Kenneth E. Cruse - Chief Executive officer, President and Director

John V. Arabia - Chief Financial Officer and Executive Vice President of Corporate Strategy

Marc A. Hoffman - Chief Operating Officer and Executive Vice President

Bryan Giglia - Senior Vice President of Corporate Finance

Analysts

Enrique Torres - Green Street Advisors, Inc., Research Division

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

Joshua Attie - Citigroup Inc, Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

David B. Katz - Jefferies & Company, Inc., Research Division

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Sunstone Hotel Investors Third Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, November 8. I'd now like to turn the conference over to Mr. Bryan Giglia, Senior Vice President of Corporate Finance of the Sunstone Hotel Investors. Please go ahead, sir.

Bryan Giglia

Thank you, Allyssa, and good morning, everyone, and thank you for joining us today. By now, you should have all received a copy of our third quarter earnings release, which was released yesterday. If you do not yet have a copy, you can access it on our website at www.sunstonehotels.com. In addition to our scheduled quarterly release, we have also provided a quarterly supplemental with additional disclosures, including property level operating statistics. The third quarter supplemental can also be found in the Investor Relations section of our website.

Before we begin this conference, 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 prospectuses, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.

With us today are Ken Cruse, President and Chief Executive Officer; Marc Hoffman, Chief Operating Officer; and John Arabia, Chief Operating Officer. After our prepared remarks, the team will be available to answer your questions.

I'd like to now turn the call over to Ken. Ken, please go ahead.

Kenneth E. Cruse

Thank you very much, Bryan, and thank you all for joining us. Today I'll cover 3 topics. First, I'll provide some perspective on the current macro context and how it relates to our business and valuation. Next, I'll give some highlights regarding our third quarter performance. And finally, I'll make some comments on the disconnect between the industry fundamentals and public valuations. After that, Marc will cover operational details and John will review the recent finance and balance sheet initiatives, as well as provide some additional color on our guidance. I will then discuss the changes to our corporate governance structure before concluding our prepared remarks and opening up the call for your questions.

On the macro context, as you are all well aware, concerns over debt issues in the U.S. and Europe reached new levels over the past 4 months. These concerns triggered significant declines in the equity markets, widening of credit spreads, slowing of hotel deal flow and declines in business and consumer sentiment. As you're also aware, the U.S. lodging industry is typically highly correlated with the U.S. economy. And while we don't discount many of the concerns regarding the global economy, there is considerable evidence that the U.S. economy and specifically the U.S. lodging industry is in far better shape than the headlines portray. Some examples, U.S. corporate profits are approaching all-time highs and businesses are sending travelers on the road in record numbers. U.S. corporate balance sheets and liquidity levels are strong. The U.S. cash-to-assets ratio is near an all-time high. And U.S. interest rates are near all-time lows, which is a meaningful positive for capital intensive businesses such as ours. And finally, public company valuations reflect pessimistic outcomes, implying considerable upside for equities once the macroeconomic context is put into more clear perspective. This last point is especially true for lodging REITs, where market valuations have been decimated over the past 4 months as a product risk of our selling.

Even as the fundamentals for our industry and the value of our underlying assets continue to improve, with our already high occupancy levels coupled with increases in group pace and solid advances in negotiated accounts, we are in a position to drive meaningful rate improvement. As a result, while there will inevitably be bumps in the road, we believe 2012 and beyond will bring continued, prolonged, if moderate, growth especially from well-located hotels and top U.S. gateway markets. In an environment in which demand grows even at a moderate pace, interest rates remain very low and supply trends remain muted, it will be materially beneficial to the value of our business.

So let's turn to our progress against our core business objectives of operational excellence, measured balance sheet improvement and disciplined capital allocation.

With respect to operational excellence, further validating my point that the headlines are disconnected from reality, during the third quarter, demand for our hotels accelerated. Our Q3 group booking productivity was the highest it's been for 4 years, and our 2012 booking pace improved to a positive 4% from a negative 2% the prior quarter. Excluding D.C. and Baltimore, which will be impacted by isolated declines in year-over-year convention activity, our 2012 pace is up 8.4%. And finally, sell-out nights for our portfolio reached a 5-year high in Q3, on a 50% year-over-year increase.

For the third quarter, our portfolio RevPAR was up 8.6% to $129.07. This compares well to industry-wide RevPAR growth of 6.1%. Our solid RevPAR growth was driven by a 3.9% increase in rate and a 4.6% increase in occupancy. Our portfolio occupancy grew to a healthy 78.1% in Q3. At these occupancy levels, we're able to shift our revenue management strategies into a high gear.

Demonstrating the growing strength and a high-rated demand, transient business trends were strong during the quarter, with premium room nights increasing 19% over Q3 of 2010 on an ADR increase of over 8%. Underlying the effectiveness of our revenue management strategies, our portfolio RevPAR index increased by approximately 200 basis points from 116 to 118 during the quarter. And on the operational efficiency front, our hotels generated 50% flow-through to EBITDA and achieved 150 basis points in hotel EBITDA margin expansion to 27.2%.

I should note that given our strong RevPAR performance, we are not satisfied with this level of margin performance. However, it's worth noting that our EBITDA flow and margin performance were impacted by isolated factors during the quarter, including contractual year-over-year wage increases in the San Diego Bayfront Hilton, which impacted portfolio margins by 40 basis points and the now-completed renovation work at our Boston Marriott Long Wharf, as well as the $500,000 reduction in cancelation fees as compared to Q3 2010.

Our corporate earnings reflected the strength of our operations. Specifically, our adjusted EBITDA of $52.4 million and our FFO per share of $0.20 both represented 33% growth over the levels achieved in Q3 of 2010, and both measures exceeded consensus.

Turning to our objective of measured balance sheet improvement, as we've stated, creating and protecting shareholder value while minimizing risks by maintaining liquidity and reducing leverage remain our key goals. Accordingly, we've recently reduced our leverage by refinancing our Doubletree Times Square mortgage and by eliminating our mortgage through a sale of a non-core hotel. These 2 transactions reduced our overall indebtedness by more than $100 million subsequent to the quarter end. We now hold unrestricted cash of approximately $150 million, well in excess of our $95 million in debt maturities due April of 2015. Additionally, we hold 11 unencumbered hotels, and our $150 million line of credit is completely undrawn.

And with respect to our disciplined capital allocation, our goal is to continually enhance our portfolio quality through intelligent, well-timed CapEx and capital recycling initiatives. During Q3, we invested $17.7 million into our existing hotels, bringing our year-to-date renovation investments up to $82.4 million. During the quarter, we completed 6 renovation projects, including our reinvention of the Boston Marriott Long Wharf public space. Through the Long Wharf project, we've eliminated what was a very dated look and transformed the lobby and public space of this hotel into a much more modern and energized business and leisure environment. And we converted an underutilized waterfront restaurant into a high profit potential waterfront meeting venue. As evidenced by the better than 12% Q3 RevPAR growth achieved by the hotels for which we completed renovations during the first half of 2011, we expect the hotels we renovated in Q3 to generate outside its growth going forward.

Also on the capital allocation front, subsequent to quarter end, we bolstered liquidity by selling the Royal Palm note for approximately $79.2 million in net proceeds, and we completed the previously announced sale of the 257 key Eugene Valley River Inn. While this was a small transaction, the sale enhanced our portfolio quality, reduced our indebtedness and further improved our cash position.

So let me finish with a few comments on valuation. By taking meaningful steps to improve our portfolio quality throughout the year, our average hotel size has now 413 keys, and based on our guidance range, we expect our 2011 portfolio RevPAR to come in between $122 and $125, making ours one of the top institutional grade of upscale hotel portfolios in our space. As our current equity price implies a per key valuation of less than $200,000 and forward portfolio cap rate in excess of 8%, we believe in a clear and significant disconnect between public market valuations and warranted private asset values that currently exist. We look forward to closing our value gap in the near future.

It's worth noting that the combination of our low share price and our capital gearing means that every $10,000 change in our per key valuation implies a substantial $1.10 improvement in our per share value. Similarly, every one-turn improvement in our EBITDA multiple implies an improvement in our per share value of $1.75.

With that, I'll now turn the call over to Marc Hoffman to discuss our portfolio operations in greater detail.

Marc A. Hoffman

Thank you, Ken, and good morning, everyone. Thank you for joining us today. I will review our portfolio's third quarter operating performance in greater detail, provide an update on our recently completed and our in-process renovations and review some of our asset management initiatives. All hotel information discussed today, unless otherwise noted, is for our 32 Hotel portfolio, which includes on a pro forma basis all 2011 acquisitions, Doubletree Guest Suites Times Square, the JW Marriott New Orleans, the Hilton San Diego Bayfront and excludes the Eugene Valley River Inn.

As indicated, our comparable RevPAR increased 8.6% in the third quarter, comprised of a 3.9% increase in average room rates and a 4.6% increase in rooms sold. Our ADR growth is in part a result of increases in premium, corporate and leisure room revenue and the reduction of discount segments. In this quarter, 28 of our 32 hotels had positive RevPAR, with 14 of those hotels generating more than double-digit growth. For more detailed information, please reference Pages 27 and 28 of our earnings supplemental.

Looking at our group business, virtually all of our 2011 group business is on the books at this time and our pace for the remainder of 2011 is up 7% over 2010 levels. In Q3, our group booking production was up almost 30% compared to Q3 last year, excluding the Hilton Bayfront, which was still ramping up in 2010 and had a record production quarter in Q3 of 2010. This was our highest third quarter group booking production in the last 4 years. The future group room booking strength was led by the D.C. Renaissance, the JW Marriott New Orleans and the Marriott Houston. Our full year 2012 group pace is positive 4% for the full 32 Hotel portfolio, driven by strong booking pace at the Hilton San Diego Bayfront, Marriott Long Wharf and Renaissance Orlando. The D.C. Renaissance and Baltimore Renaissance Hotels will be negatively affected in 2012 by the off calendar year in the D.C. convention market. Without these 2 hotels, our 2012 booking pace for the remaining 30 hotels is up a positive 8.4%. Furthermore, this doesn't reflect the likely benefit we will realize in a number of transient hotels in 2012, especially in New York, Chicago and Boston as a result of compression from strong convention calendars in those cities.

From a segmentation standpoint, Q3 group revenues were up 4.1%, driven by 2.9% increase in group ADR. We also strong saw a strong increase in our transient rooms. Our Q3 transient room revenue increased 11% to last year, with a 6.6% increase in room nights. In the third quarter, our hotels had 609 sell-out nights compared to 408 last year based upon a 98% occupancy standard. This is the highest number of sell-outs in 5 years for Q3, indicating our portfolio is operating at occupancy levels that will enable our operators to compress rates and capture a higher percentage of premium rated business moving forward. Hilton Times Square and Embassy Suites Chicago both saw a significant increase in sell-out nights, to name a few.

As an indication of both our ability to compress business into higher rated segment and the continued recovery in business demand in the third quarter, our revenues from premium demand sources were strong, with revenues increasing 29%. ADR increased 8.4% and premium room nights increased an impressive 19%. As hotels continue to mix shift their business into higher rated segments, our corporate negotiated business remain basically flat in Q3, as we were able to close out our lower rated corporate negotiated channels in some of our higher occupancy hotels and push those customers of business into premium-rated segment.

Ken mentioned our focus on operational excellence. Our asset managers are continuing to work closely with our management operators on a weekly basis to maximize hotel revenues and profits through nimble rate, occupancy strategy shifts depending upon the changing market conditions. In addition, we continue to work with all our operators to ensure that as RevPAR increases, operating expenses do not creep back in unless significant occupancy increases justify higher cost as we, as asset managers, agreed to those increases. This strategy is a key driver to the successful quarter as many of our hotels were successful in controlling their expenses, while occupancy continued to increase.

Our Houston hotels are beginning to see improvements this year as they have substantially completed their renovations and repositioning and now offer a competitive product.

Several of our eastern region hotels were impacted by Hurricane Irene. Our overall RevPAR for Irene was affected by 55 basis points from lost room revenue during the hurricane. We lost approximately $600,000 in property level EBITDA. Our Marriott Long Wharf, Doubletree Times Square, Renaissance Baltimore were the most impacted by the hurricane. The Renaissance Westchester saw a positive increase in revenue from the hurricane, picking up support companies to assist the people from the hurricane.

As we've discussed before, we undertook a large capital program in 2011. We have completed all our projects on time, on budget and with minimal disruption, considering the amount and breadth of the work completed. As Ken noted, we are seeing positive impact from our renovations that we completed prior to the beginning of Q3. The 9 hotels that were completed prior to the beginning of Q3 collectively had a RevPAR growth of 12.1% in Q3. In fact, 4 of our hotels that were totally reinvented earlier in the year, the Courtyard LAX, the Marriott Houston, the Kahler Inn & Suites and the Doubletree Minneapolis saw our combined Q3 RevPAR growth of nearly 24% over a time period that had no renovation disruption the prior year. During the third quarter, we completed the renovation at both the Marriott Long Wharf and the Hilton Houston and we have high expectations for both properties going forward. Our last renovation project for 2011 will be the rooms at the Del Mar Marriott, which will begin in December. We do not expect any further displacement from renovations in these projects in 2011.

With that, I'd like to turn the call over to John, to discuss our balance sheet and financial initiatives.

John V. Arabia

Thank you, Marc. Good morning, everyone. Today, I'll give you an overview of several topics including: First, our liquidity and access to capital; second, recent financing activities and our near-term debt maturities; and third, details regarding our earnings guidance.

We'll start with liquidity. Sunstone ended the third quarter with just over $223 million of cash, including $160 million of unrestricted cash. At the end of the quarter, we completed 3 transactions that impacted our cash balance. Those transactions include: first, the refinancing of the Doubletree Times Square, in which as previously announced we utilized $95 million of cash to repay the existing debt and to cover closing expenses; second, the sale of the Royal Palm mortgage note generated cash proceeds of $79.2 million; and third, closing the previously announced sale of Eugene Valley River Inn, in which we netted approximately $5 million of cash and eliminated $11.5 million of indebtedness. Adjusting for these transactions and portfolio cash flow subsequent to the end of the quarter, our current cash balance stands at approximately $215 million, including approximately $150 million of unrestricted cash.

In addition to our strong cash position, we have an undrawn $150 million line of credit and we have 11 unencumbered assets that collectively are expected to generate over $40 million of EBITDA in 2011. Let me make one point perfectly clear, given our significant liquidity position, the highly renovated state of our portfolio and our current share price, the company does not need nor does the company currently intend to issue equity at current levels. Our shares have been recently traded and implied forward-looking cap rate after deducting a contractual CapEx reserve in the low 8% to low 9% range. While a small number of our hotels would likely trade at such a high cap rate, the bulk of our portfolio warrants public market pricing while inside that implied cap rate range. While share repurchases are not currently on the table as a result of our ongoing focus on leverage reduction, buying our stock currently makes more sense than acquiring hotels or raising equity at the current share price.

Now let's move on to the recent financing activities in our near-term debt maturities. As just mentioned, we recently refinanced the Doubletree Times Square with a $180 million 7-year floating rate loan at LIBOR plus 325. Over the past 3 months, the credit markets have become more restrictive for hotel lending. While small loans are still available for credit worthy borrowers, it has become increasingly difficult to access loans over $100 million particularly for hotels in the secondary and tertiary markets. Furthermore, the cost of debt has increased by roughly 50 to 100 basis points over the same time period.

Despite a difficult lending environment, we were able to leverage our lending relationships and a phenomenal piece of real estate to secure an attractive mortgage on the Doubletree Times Square. The loan provides us with significant flexibility, fills the hole in our debt maturity schedule in 2018 and maintains our variable rate debt exposure.

Following these recent transactions, our debt has an average term to maturity of nearly 6 years, an average interest rate below 5%, and our variable rate debt as a percentage of total debt stands at 27%. Based on the company's market capitalization at the end of the quarter, our $95 million of debt maturities through early 2015 represents less than 5% of our enterprise value and is considerably less than the amount of our current unrestricted cash balance. The completion of the Doubletree refinancing and the Royal Palm note sale have derisked the company, eliminated significant refinancing risk over the last next 3.5 years and provided us plenty of time to work on deleveraging the company in a value-added and thoughtful manner. For more information, please refer to the debt and debt maturity schedules on Pages 20 and 21 of our supplemental disclosure.

At the end of the quarter, Sunstone had $1.67 billion of consolidated debt, which includes 100% of the $239 million mortgage secured by the Hilton San Diego Bayfront. Adjusting for the debt attributed to our minority partners in this asset and the transactions completed subsequent to the end of the quarter, our current pro rata debt balance is currently $1.52 billion. Including the Valley River Inn transaction, our total indebtedness declined by $107 million from the end of the second quarter.

Now let's turn to our updated earnings guidance. We updated our full year earnings guidance to reflect the sale of the Royal Palm note and more modest growth expectations for operating fundamentals for the fourth quarter. A full reconciliation of current guidance and adjusted prior guidance can be found on Pages 16 and 17 of our supplemental, as well as in our earnings release.

Based on our full year RevPAR growth guidance of 6% to 8%, our 2011 adjusted corporate level EBITDA would be between $204 million and $209 million, and our FFO would be between $0.79 and $0.84 per share. While we have witnessed anticipated pockets of weakness in October, bookings for November and December remains strong. However, as Ken mentioned, the heightened level of economic and geopolitical uncertainty warrant a dose of conservatism when it comes to short-term forecasting. Accordingly, we have maintained a conservative view towards the fourth quarter's operating fundamentals and earnings. In particular, fourth quarter RevPAR will be negatively impacted by isolated factors, including a change to the Hilton HHonors redemption program at our Doubletree Times Square and lower year-over-year group business in San Diego and Baltimore. We will provide 2012 guidance during our next earnings conference call in February.

That said, we remain optimistic regarding the outlook for revenue and profit growth in 2012 as a result of positive group booking pace, strong group booking production and healthy pricing pressure in many cities, stemming from a high number of sold-out nights.

For those of you starting to sharpen the pencil on the 2012 quarterly earnings, year-over-year RevPAR growth is likely to be strongest in the second quarter and softest in the first quarter due to current booking patterns at several of our large group hotels.

With that, I'll turn it back over to Ken to wrap up our prepared remarks.

Kenneth E. Cruse

Thank you very much, John. I'd like to spend a moment on forward level changes we announced yesterday. In short, we believe these comprehensive changes further improve the alignment of our corporate governance structure with the interest of our shareholders while clearly establishing the management's autonomy with respect to running the business.

First, Bob Alter has resigned as Executive Chairman, effective as of yesterday and announced his retirement from Sunstone's Board effective in May of 2012. From now until May of 2012, Bob will remain a Director on Sunstone's Board with the title of Chairman Emeritus and Founder. Bob has announced that he will not stand for reelection to our Board of Directors in our May 2012 Annual Meeting. On behalf of the entire Sunstone team, we sincerely thank Bob for his many contributions to the company and for his leadership and mentorship over the last 16 years. We appreciate the positive effects Bob has had on Sunstone's team, portfolio and strategy, and we wish him all the very best as he shifts his focus into his numerous outside business interests.

Second, Lew Wolff will no longer serve as Co-Chairman, but will remain a Director. We also thank Lew for his many contributions to the company while he served as Co-Chairman of the Board.

Third, Keith Locker, who has been a Director for Sunstone for the last 5 years and who currently serves as Chair of our Strategic Planning and Capital Markets Committee, has been named our new Independent Chairman of the Board. During his term as Director, Keith's extensive real estate and investment banking expense have been invaluable to the company. Keith is CEO and Co-Founder of Inlet Capital LLC and has acted as an investor, fund manager, investment banker, merchant banker and REIT expert for over 25 years.

Fourth, we have added 2 new deeply experienced independent directors to our board. Both bring to Sunstone an impressive REIT and lodging experience, as well as demonstrated track records of creating meaningful shareholder value. Joining our Board as of yesterday is Andy Batinovich, who is Co-Founder of Glenborough Realty Trust and currently serves as President and Chief Executive Officer of Glenborough LLC, a privately held full service real estate investment and management company focused on the acquisition, management and leasing of institutional-quality commercial properties. Andy is a member of several industry associations.

Also joining our Board as of yesterday is Doug Pasquale, who was previously CEO and Chairman of the Board of Nationwide Health Properties until its sale to healthcare REIT, Ventas, early this year. Doug currently serves as the Director on several boards, including Ventas and is active in numerous industry groups. Doug also previously served as President and Chief Executive Officer of Richfield Hospitality Services and Regal Hotels International-North America.

And finally, Keith Russell, a current director, has been named the Chair of our Audit Committee and Jamie Behar, also a current director, has been named the Chair of our Nominating and Corporate Governance Committee.

Before we open up the call to questions, let me reiterate the framework of our balanced strategy. First, as you heard from Marc, we will continue to seek ways to achieve superior operational performance in all of our hotels. Second, as John discussed, we remain committed to maintaining appropriate levels of liquidity while methodically improving our balance sheet in ways that are additive to shareholder value. And finally, as I noted, we will continue to improve our portfolio quality and growth profile by selectively recycling and allocating capital into attractive investment opportunities.

In spite of market challenges, Sunstone is clearly moving in the right direction. And while we delivered strong performance once again this quarter given our discount valuation, it is clear to us that we must continue to make the correct decisions and execute on our business plan with discipline and consistency in order to build investor demand and unlock the significant value in our organization. I want to thank the entire Sunstone team for all they've done and continue to do to advance our business objectives, and I thank you for all your interest in Sunstone.

With that, we'd like to open up the call to questions. Alyssa, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeff Donnelly with Wells Fargo.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

First question just pertains to the change at the board level. Can you maybe talk a little bit more about the process you ran to identify new board members? How comprehensive of a search it was? And who ultimately made the decision on the choices?

Kenneth E. Cruse

So the question about the process to identify and add the 2 new independent directors to our board, which we couldn't be more pleased with the outcome of that process. We ran a fairly extensive exercise. Many directors in our board had some ideas in terms of names. We did employ or engage outside parties to vet out the candidates. This went on for approximately 2 months, or 1.5 months was the length of the process. And in the end, we distilled it down to these 2 candidates that we named today. Once again, we think that they're very additive to the company in terms of their depth of experience, their industry background in terms of creating value for REIT investors, and we think there's a good broadening of the capabilities of our board.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And I guess, in regards to that, were you looking for somebody -- not just for the folks you brought on but also the change in leadership, were you looking for someone with hotel experience, real estate expense or even just experience with frankly selling companies, I'm not saying that you're going to do that, but have that background? How did you weigh those different?

Kenneth E. Cruse

All fair to questions, looking at my comments, I mentioned that we're committed to finding ways to unlock value in this company. So we do want -- we want to add industry professionals who have experience in doing just that. And so having REIT experience and generating meaningful returns for the stockholders was the primary focus in terms of qualities we were looking for, and Doug and Andy both embody those qualities.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And I know it's early on, but do you have a sense of how they're thinking about the appropriate level of leverage for the platform? I mean, do you have an expectation that -- or any sense that they could share a different perspective on the direction we've been taking in the last 12 to 18 months? Or is it too early to say?

Kenneth E. Cruse

No. A good question, Jeff. Clearly, we're looking for a Board of Directors that will challenge management's assumptions. Management is responsible for developing the business plan and executing on the plan, but we want a Board of Directors that will help us that vet that out. We weren't looking for board members who are going to be "yes" people, and I'm certain that nobody on our board is a "yes" person. And that said, I don't believe currently there exists any disconnect in the view of the company's leverage and where we should take the company in terms of our capital structure.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And just one last question, actually more on the operations side of things. You gave some data about your 2012 bookings from what you can see today. Is there a materially different view if you really just drill down -- I mean, if you look at your supertanker hotels, if you will, in San Diego or New York, I mean, are you seeing materially different out of them that you're seeing in the aggregate?

Kenneth E. Cruse

I'll give you a little bit of detail and I also want to share -- give the mic over to Marc Hoffman as well for a second. As I mentioned in our call, our pace is up about 4% next year. That's mostly in room nights. We are seeing good booking activity, and I think the context is very important. When you think about last quarter, our pace was down 2%. So just during the third quarter, we increased our pace remarkably. We just found out this morning that our D.C. hotel was successful in booking approximately 11,000 room nights into 2012, which is as we've mentioned a couple of times the need period for that hotel. So D.C. has made up some ground, but still D.C. and Baltimore will be soft. Interestingly, if you exclude D.C. and Renaissance from the pace numbers, our portfolio pace is up approximately 12%, made up of a 9.7% increase in occupancy and a 2% increase in rate. So I would tell you those isolated markets which have very weak citywide business in 2012 were seeing good trends. Marc, why don't you add a little bit of additional color on that?

Marc A. Hoffman

Yes. Thanks, Ken. Jeff, the other positive for us is that where we have compression of hotels, we have really strong city involvement next year. As I think you're aware, the City of Boston is very strong next year with a record number of citywides. It will pass its ever historic peak of demand in the city. 2011 citywides were up by, I think, around 21 and room nights will be up as well. 2012 will have 26 conventions, which is 5 more than 2011 and rooms are up 15.4% compared to 2011, which was down 17%. New York citywides are up -- there are 23 major citywide conventions in 2011. 2012, that number is up to 29. And in San Diego County, 2012 citywides, while they're down 3 to 57, the room night volume is up significantly, and we expect San Diego to be very strong. So from that standpoint, sort if you take out D.C. and Baltimore, and what Ken talked about, we had very positive October booking that we just heard about today, the rest of our portfolio is spread very well.

Operator

And our next question comes from the line of Smedes Rose with Keefe, Bruyette & Woods.

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

John, you had mentioned that RevPAR, you were thinking, as looking the weakest in the first quarter of '12 and strongest in the second. Is that a function of seasonality or just of booking trends as you see them right now?

John V. Arabia

No. I'll turn this over to Marc really, because he has more insight on that. But really, just the way group booking pace is winding up, it shows that while we expect a strong year in '12, the first quarter is a little bit softer than normal. Second quarter is stronger than normal. And so we just wanted to highlight that for people's quarterly estimates once those start being provided.

Marc A. Hoffman

Yes. I mean, just as both Ken and John said, Q1 is looking to be down minus in the 3% to 6% range in group booking pace currently. And that's sort of based upon the results we just got from D.C. Q2, very strong. We're plus 12.5%. Q3 looks solid. We're plus 7%. And Q4, we're approximately flat in pace. And the Q1 is heavily affected by D.C. and Baltimore. Without those 2, we would be up slightly. So I didn't -- we did not calculate in these 11,000 rooms we just got in today. So if they are dropping into Q1, it will make that much more improvement to Q1 as well. And then -- so we continue, most importantly, to see a trend of improvement.

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And then I just was wondering if you could give any sort of parameters around CapEx for next year? Is it primarily just maintenance related or are there -- I think you mentioned the Del Mar Hilton starts at the end of this year. Are there any sort of any larger projects for next year?

Kenneth E. Cruse

Smedes, it's Ken. I'll take this one. As you know, we had a pretty front-end loaded CapEx calendar for 2011 and our portfolio is generally in a very good shape. We do have a couple of projects that are lined up for 2012. Specifically, right now, we're working on the rooms in the Marriott Del Mar and we've got project in Westchester for the rooms' renovation. And then later on in the year, the major one would be the D.C. Renaissance, which is an 800 room property. We're going do a room preview there. So -- but beyond that, we're pretty ahead of the cycle in terms of the renovation projects for our portfolio.

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

Is there a dollar amount that you can put on maybe the 3 of those combined or...

Kenneth E. Cruse

We're not yet going to put a dollar amount to it. I would tell you it will be higher than our typical 4% range, but it's not going to be as high next year as it was this year, which we're estimating about $120 million this year.

Operator

And our next question comes from the line of Shaun Kelley with Bank of America Merrill Lynch.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

I just wanted to touch real quickly on, during the prepared remarks, there's a comment about some anticipated pockets of weakness in October. Could you elaborate a little bit just on what you're seeing there and what markets those were referring to specifically?

Kenneth E. Cruse

Sure, Shaun. I'll take this and I'll shift it back over to Marc. This is Ken. For the fourth quarter, there are couple of noteworthy anomalies, I would say, within our portfolio. Not just October, but today, that will affect our entire fourth quarter. One is the Doubletree Times Square Hilton, where the hotel just continues to fire on all cylinders and it's producing incredible growth on the RevPAR side. But due to a change in the way the Hilton HHonors system, it works this year. The hotel will actually see a reduction in RevPAR toward the end of the fourth quarter just because the hotel was able to really book massive rates into the hotel during the -- in the Times Square -- into the year period. So that was one piece of it. You're also seeing just affecting October specifically, softness in both D.C. and Baltimore. And this was just primarily group business on a year-over-year basis. Marc, do you want to add more color on it?

Marc A. Hoffman

Yes, the only other thing is that would be of Rochester, our Rochester hotels. All of them have been soft and mostly because of the disturbance in our international business. Our international business were heavily affected from the Mideast part of the world. With the disturbance in the Mideast, we've seen a significant drop in that business over the last 3 or 4 months. We expect it to come back. We just had a great piece of business, short term, that dropped in from Abu Dhabi. So again, that's probably the only other market to talk about.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Okay, that's actually really helpful. And then second was just on New York. And the idea there, we could do get a lot of questions about impact or supply, particularly at some, maybe the seasonally light first quarter. Just kind of generally speaking, your viewpoints on what you guys are seeing for the first quarter next year and how much you think you might be affected there. And is that factored into, I guess, a slightly more conservative stance around kind of Q1 as we think about seasonality?

Kenneth E. Cruse

No. Our New York properties didn't factor into our conservative view on Q1. That's more group related for the big boxes, primarily D.C. As far as supply in New York City, we're not particularly concerned about supply. Our 2 hotels saw a combined -- RevPAR growth is 13.9% in Q3 and the Hilton ran 95.4% occupancy and the Doubletree ran 98.3% occupancy. So clearly, there's a lot of headlines about supply in New York City. We've got incredibly well located hotels that have a competitive advantage in terms of their room size, not just their location but their room size. So the Doubletree has 540-square-foot rooms and the Hilton -- it all has 350-square-foot rooms. Most of the properties that you see come on at the market are kind of in the 200-square-foot room range. So I believe we'll continue to enjoy the locational and just property quality advantage over the new supply. And there are a couple of hotels coming on. You saw an announcement that the Hyatt, one of the 7 empires, would be coming onto the Times Square market. We'll watch that one closely. But again, we think that given the location of our properties and just the fact that demand seems to radiate out from the core market of Times Square, we feel very well protected.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

That's helpful. Then one just kind of a smaller digging in on that, one more level would be, any changes out of -- specifically, I imagine that you get this international traffic into some the hotels on the transient side. Any changes out of particularly Europe from the demand side that you guys have seen in either Q3 or in October?

Kenneth E. Cruse

We watched that fairly closely, and I would say that the international demand turns have been fairly consistent in the Times Square market. Marc mentioned international business at the -- in our Rochester portfolio. That's actually what we call our hotel within a hotel. It's a luxury property within the Kahler Grand at the international. Coincidentally, much of the business for that particular hotel within a hotel does come from the Middle East, and that's where we'd seen a softening in demand. But that's really specific to that market. And we do believe that that's just a very lumpy business for that property.

Operator

And we have a question from the line of Enrique Torres with Green Street Advisors.

Enrique Torres - Green Street Advisors, Inc., Research Division

You talked a little about the 12 good grade pays. Can you give us a little bit of color on how these are looking a little further out in '13 and '14? And if you're seeing any particular splits between corporate side and the leisure side?

Kenneth E. Cruse

Yes. I'll start and just hand it over to Marc. What we've seen is, as we touched on during the call, record productivity from our booking engines and that really relates -- productivity refers to all future periods. So we've seen quite a bit of booking not only in the 2012 but for the bigger box hotels, where the booking goes into 2013 and beyond. So right now, we do have a couple of markets that are on our radar screen for 2013. But generally, we're seeing very good booking trends into that year. Marc, can I ask you for a little bit more color commentary?

Marc A. Hoffman

Yes. Enrique, it would be all group driven because obviously, business transient doesn't book out that far at all. So from a standpoint of group pace, our group pace into '13 and '14 is fine, and we've got good pace. The x superior pace base in our D.C. and Baltimore markets coming off of the weakness of '12, they look terrific also because remember, you're going to have an inauguration. And even if there's no change in administration, the first year of the administration is always a big year in D.C. That will help push off into Baltimore. Orlando looks good in '13. So in general, our '13 numbers look good. And '14, still far enough out that if we have concerns, we're not overly concerned about filling the holes.

Enrique Torres - Green Street Advisors, Inc., Research Division

All right. That's helpful. And then a question on kind of your disposition plan. It seems like you have an opportunity to do something similar to what DiamondRock has been doing in terms of selling assets that are highly leveraged and using that as a way to adjust the deleveraging strategy. What confidence or what was your view on the pricing they achieved on their 3 assets? And does that provide increased kind of confidence in your ability to execute dispositions in the near term?

Kenneth E. Cruse

Okay. Look, we congratulate DiamondRock on that sales. I think it was a really good execution. Pricing was very attractive from our perspective. They priced at about 7.5% cap rate. And as we talked about in our prepared remarks, our company is trading at close to an 8.5% cap rate. So clearly, that was very good execution. And as we touched on briefly in our prepared remarks, our focus clearly has shifted to carefully divesting of assets where we can give similar execution on the trade, especially where we can continue to advance our deleveraging objective at the same time.

Enrique Torres - Green Street Advisors, Inc., Research Division

Are you guys marketing at the current time?

Kenneth E. Cruse

We have typically pursued that first, but we don't go to the marketing channels when we sell hotels. We do have several assets that are -- that we're considering making moves on.

Operator

And our next question comes from the line of Michael Salinski with RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

I think you mentioned 2% up for 2012 in terms of group bookings. How much of that -- how much of your targeted booking activity is in the books right now?

Kenneth E. Cruse

So we actually mentioned 4% up in terms of group pace for 2012. And as far as what's on the books right now, the big box hotels have -- which is really the ones that you want to look at for our portfolio, have approximately 83% of their group rooms on the books at this point. And for the smaller hotels, many of the assets actually booked many of the rooms in the year for the year. So I think the better way to think of it is the pace numbers. And our pace is, as we mentioned, ahead of last year's levels by about 4%. Let me shift it over to Marc for additional color.

Marc A. Hoffman

Yes. Typically, what you do is you look at crossover goal, let's say, is how the hotels crossover on December 31. Since, obviously, we're 2 months ahead of that timeframe, we look at that every single month. So we currently have approximately 575,000 group rooms on the books for 2012, which is approximately 16,000 more rooms in the same time last year. That doesn't include this very strong booking we had from the Washington, D.C. area. So from that standpoint, we are pacing well compared to where we think we need to be by year end. And again, as Ken said, the majority of our smaller hotels book 80% of their business in the year for the year.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

That's helpful. A second question. Can you talk a little bit about how the JW Marriott is performing there in New Orleans given a new Hyatt opened there?

Kenneth E. Cruse

Yes. The performance of JW has been very -- has been solid and we have a very good third quarter with the hotel. And booking pace for next year is basically flat. And we expect the hotel to do very well. We do have a large renovation plan, which is all designed but we're in a timing process of it now to ensure we don't have any disturbance.

Operator

And we have a question from the line of Josh Attie with Citi.

Joshua Attie - Citigroup Inc, Research Division

What's the $65 million of restricted cash on the balance sheet? And how accessible is that to the company?

Kenneth E. Cruse

The $65 million of restricted cash typically relates to FF&E reserves, but there are also lender reserves in that amount. Most of our loans have some sort of -- whether their property tax or insurance reserves. And that number is pretty static at that level, $65 million. Beyond that, there are no deal deposits or what have you.

Joshua Attie - Citigroup Inc, Research Division

Okay. And could you just explain the Doubletree Times Square impact in the fourth quarter on RevPAR? Is that just an accounting issue? Or are you actually getting less earnings from the hotel in the fourth quarter because of something related to their guest loyalty program?

Kenneth E. Cruse

Yes. So I'll be specific on this. On the Hilton, on its HHonors program, they changed the way that the math works. They do typically on a year-by-year basis. And so the way that the math works materially impacted the way that the Doubletree in Times Square would book its rooms over the -- particularly over the New Year's Eve time period. The net effect of that is it will be a real reduction in RevPAR for that hotel. We calculate it to be approximately 11% reduction as an impact of that particular program change. It affects our fourth quarter portfolio RevPAR by about 1.3% on a portfolio-wide basis that was a material change to the program. It was a 1-year type change, and it was something that we contemplated when we acquired the hotel. But it does -- it's important that the Street notes that, that change is coming and it will distort the numbers in the fourth quarter a slight bit.

Joshua Attie - Citigroup Inc, Research Division

So does that mean that more rooms go -- people can use their points for those rooms and see you don't get as much revenue for it?

Kenneth E. Cruse

Essentially, that's how the change will work. Yes.

Joshua Attie - Citigroup Inc, Research Division

And is that a permanent change? Or does that -- is it just this year and reverses next year?

Kenneth E. Cruse

The program is going to be refined on a year-over-year basis. And so who knows what the changes will be next year? But our assumption is that this will be a permanent change to the program. It doesn't really affect the run rate of the hotel, and it certainly did not affect our underwriting. It's just a year-over-year anomaly in terms of what the headline RevPAR number is going to look like.

Operator

Our next question comes from the line of David Katz with Jefferies & Company.

David B. Katz - Jefferies & Company, Inc., Research Division

I wanted to -- what I'm trying to figure out and taking perhaps an unspecific but long term view on this. I'm trying to figure out what the margin opportunity is within the portfolio as it sits today. Taking Ken's commentary earlier about market multiples or stock valuations, et cetera, trying to see where this EBITDA ultimately could be headed and obviously, it's all in the context of limited visibility on the top line for the next couple of years. But what can you offer to sort of help me hash out the ultimate margin opportunity for the portfolio today?

Kenneth E. Cruse

Okay. Sure, David. Look, we think the margin opportunity is pretty profound. You may have heard me reference this on prior calls. I didn't do it on today's call, because we've been hitting this one pretty hard, but we focus on operational efficiency very, very deeply. And if you look at the trough margin performance for our portfolio, just comparing the 2009 trough to the 2003 trough, our portfolio on a same-store basis performed at 230 basis points higher than margins. And so our focus right now is to preserve that margin efficiency going forward and drive conservatively higher margins as we move into 2012 and beyond. Peak margins for our portfolio were just about 30%. As we talked about before, on to the third quarter this year, we achieved a 27% EBITDA margin. We see our portfolio achieving higher than peak margins going forward. And our expectation is we'll likely achieve those margins potentially before we achieve peak revenues.

David B. Katz - Jefferies & Company, Inc., Research Division

Got it. So it sounds like what we're saying is that there's at a minimum of 300 basis point margin opportunity just to get back to the prior peak.

Kenneth E. Cruse

Yes.

Operator

And we have a question from the line of Dennis Forst with KeyBanc Capital Markets.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

In fact, most of my questions have been answered. I still wanted to bug you a little bit, Ken, about that Hilton HHonors situation at the Doubletree. Does that mean that rooms booked using points do not count towards the RevPAR? You said they would impact the whole portfolio 1.3 percentage points from the fourth quarter. .

Kenneth E. Cruse

Yes. So the way it works -- the way it worked last year was that there was no limit in terms of the rooms that you could take, in terms of redemption rooms. And they've increased that limit. And so what happens is we booked RevPAR for the redemption rooms at the prevailing RevPAR rate for that night. And last year, for the New Year's time period, the hotel generated significant RevPAR number, primarily by virtue of a quirk in the program. And Hilton has adjusted that program. This was by the way prior to our period of ownership. Hilton's adjusted that program at this point. And so now, I think the hotel will not see an ability to drive quite as high of a RevPAR number on the New Year's time period. So we may be being conservative with our estimates for the reduction, but we thought it was important to point out to the investors that you will see a change in the year-over-year numbers on the RevPAR for that property.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

And is it so significant because it is Times Square and it is New Year's Eve? Or will this change impact all Hilton hotels and everybody's portfolio?

Kenneth E. Cruse

No, no, no. It's very specific to this property because it is Times Square, because it is New Year's Eve and because they are 540-square-foot rooms. That's a hugely in-demand property on New Year's Eve. And just a change in the program does marginally -- or does materially actually affect this property's ability to drive RevPAR on that one day of the year.

Operator

Gentlemen, I show no further questions at this time. Please continue.

Kenneth E. Cruse

Thank you very much, Alyssa, and thank you all for joining us today. We look forward to speaking with you in Dallas or in New York or if not on our next quarterly call in February.

Operator

Ladies and gentlemen, that concludes our call for today. Thank you very much for your participation. You may now disconnect.

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