Sunstone Hotel Investors, Inc. (NYSE:SHO) Q4 2016 Earnings Conference Call February 22, 2017 12:00 PM ET
Aaron Reyes - VP, Corporate Finance
Bryan Giglia - CFO
John Arabia - President and CEO
Marc Hoffman - COO
Smedes Rose - Citi
Shaun Kelley - Bank of America
Chris Woronka - Deutsche Bank
Lukas Hartwich - Green Street Advisors
Thomas Allen - Morgan Stanley
Ryan Meliker - Canaccord Genuity
Michael Bellisario - Baird
Bill Crow - Raymond James
Anthony Powell - Barclays
Bryan Mayer - FBR and Company
Good morning ladies and gentlemen and thank you for standing by. Welcome to the SunStone Hotel Investors’ Fourth Quarter Conference Call. At this time all participants are in listen-only-mode. Later we will conduct the question-and-answer session and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today February 22, 2017 at 9 am Pacific Time.
I will now turn the presentation over to Mr. Aaron Reyes, Vice President of Corporate Finance. Please go ahead.
Thank you, Percevia, and good morning everyone. By now you should have all received the copy of our fourth quarter earnings release and supplemental, which were released yesterday. If you do not yet have a copy you can access them on our website.
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 press release, 10-Q, 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 adjusted EBITDA, adjusted FFO and hotel adjusted EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles.
With us on the call today are John Arabia, President and Chief Executive Officer; Bryan Giglia, Chief Financial Officer; and Marc Hoffman, Chief Operating Officer. After our remarks, we will be available to answer your questions.
With that, I would like to turn the call over to John. Please go ahead.
Good morning, everyone, and thank you for joining us today. In some quarterly calls, there is little to discuss other than our routine update of operating fundamentals and quarterly earnings. Given recent events, this isn’t a typical quarter as fourth quarter operating fundamentals and earnings materially exceeded our expectations and the recent increase in our share price and corresponding reduction in our cost of capital have increased our appetite to acquire high quality hotel real estate after being a net seller of hotels for nearly two years.
Furthermore the recent sale of another hotel, 2.40 and various other financing transactions leave us with significant optionality and external growth capacity that represents unrecognized earnings potential for our shareholders. I am sure one of the biggest questions in many investors mind is whether or not there has been improvement in hotel operating fundamentals, since the Presidential Election.
The simple answer to this question is this. It is too early to tell whether the recent uptick in various elements of our business is sustainable and there remains a wider than normal range of potential outcomes for 2017 RevPAR and EBITDA, including potentially negative outcomes. That said, we are more optimistic about our 2017 prospects now than we were three months ago.
So let’s discuss some of these trends, both positive and negative, beginning with our fourth quarter operating results. We are pleasantly surprised by a stronger than anticipated revenue growth and profitability during the fourth quarter of 2016. Our quarterly operating results, which include total portfolio of RevPAR growth of 1.6% exceeded our expectation and surpassed the midpoint of our guidance range by nearly 260 basis points.
This stronger than anticipated top-line growth combined with lower than expected cost related to energy, property tax and corporate overhead, resulted in fourth quarter adjusted EBITDA and adjusted FFO per diluted share materially exceeding the top end of our guidance range.
Overall the operating environment in the fourth quarter was more constructive than we had expected when we spoke in early November, although admittedly our expectations were low coming off of three quarters deteriorating RevPAR growth, largely resulting from softer than anticipated transient pricing.
During the fourth quarter, our total portfolio average daily rate increased 160 basis points, while occupancy remained flat at 77.8%, resulting in portfolio RevPAR growth of 1.6%. In a reversal from the second and third quarters transient demand was stronger than group demand and we had a bit more success pushing both transient and group rates.
Group revenues from the quarter came in lower by 2.8% on a 5.3% decline in room nights, relative to prior year, while average group rates increased approximately 2%. Nearly 300 basis points of our decline in group demand can be attributed to our two Houston hotels, which experienced a significant slowdown in one of their recurring training groups, which produced approximately 2,000 fewer low rated group room nights than they did a year ago in the fourth quarter.
As discussed on the call last quarter, our fourth quarter guidance assume that actualized group rooms as a percentage of their group blocks would be lower than the historic average. However the fourth quarter actual group slip percentage of nearly 84% came within our historic norm of 83% to 85% and exceeded our internal forecast of 79%, which on our last call, we said could be prove to be conservative.
Additionally banquet and audio-visual spend from group room was up nearly 4% in the quarter. These two data points related to group attendance and group spend suggest that group business remains healthy.
Transient and contract demand was stronger than expected and back filled for the declining group room nights during the quarter. Transient and contract demand increased 2.7% while rates increased by 1.2%. Transit demand was healthy in several markets in the quarter including Washington DC, Time Square, Baltimore and Orlando.
Turning to margins during the fourth quarter comparable hotel EBITDA margins contracted by 80 basis points as sub-2% RevPAR growth was not enough to maintain margins despite property level cost controls, operational efficiencies and lower energy cost and real estate taxes.
Normalizing for the ground rent increase at the Hilton San Diego Bayfront margins for the quarter would have decreased by approximately 30 basis points. On a full year basis hotel EBITDA margins contracted by 30 basis points and adjusting for the Bayfront ground rent increase full year 2016 margins would have been up 20 basis points.
For the full year RevPAR growth was an anemic 70 basis points for our entire portfolio. Adjusting for approximately $12 million of rooms revenue displacement at our Boston Park Plaza and Wailea Beach Resort our RevPAR growth would have been approximately 2.3%. While room nights decelerated in the fourth quarter we still achieved a record $1.37 million group room nights for the year the highest number of group room nights on record for our portfolio.
As for 2017 we expect our portfolio to generate RevPAR growth of 50 to 350 basis points coming from ADR growth in 18 of our 27 hotels and robust ADR and occupancy growth in Wailea and Boston as they continue to ramp up. At the end of January our 2017 group pace for the entire portfolio was roughly flat.
However without the two Houston hotels, which in the previous year included significant group reservations that did not materialize our portfolio pace is up almost 3%. While one month does not make a trend we were encouraged with our January short-term group bookings as in the month for the quarter group bookings increased by over 25%.
Furthermore at the end of January approximately 75% of our forecasted group room nights for the full year have been identified. This figure is 230 basis points ahead of where we stood at the same time last year as we have worked with our operators to group up at several of our hotels.
Overall we expect our hotels in San Francisco, New York City, Portland, Houston and Chicago to underperform the portfolio, while our hotels in the Los Angeles and the rest of Southern California, Wailea, Washington DC, and Boston are expected to provide outsized growth.
More importantly we’re pleased with the initial results from our two recently completed repositionings. Boston Park Plaza continues to ramp up during the fourth quarter. Group revenues grew 12% in the quarter on a 2% increase in group room nights and a 10% growth in group ADR. The growth in group ADR is encouraging as we start to generate more production in the higher rated corporate segments through the repositioning effort.
Additionally 2017 pace remains very strong at the hotel up 31% from a year ago as we look to achieve the most group rooms at the highest group ADR ever attained at this hotel. We’re also pleased with the efforts of our own property sales team as they produced 23% more group room nights in ‘16 they did in ‘15 and produced more than double the group room nights that was the case five years ago.
As those of you who have seen this beautiful hotel, we have fundamentally changed this asset and improved its long-term earnings power. Even more exciting is our push renovation performance at the Wailea Beach Resort. Following the substantial completion of the renovation in late December, the hotel not only looks incredible, but more importantly has begun to ramp up nicely.
Average rate at the property in December was up $100 or nearly 32% from last year. Building off a strong finish in 2016 the Wailea Beach Resort continues to grow rate in January and relative to its competitive set is closing the rate gap faster than we anticipated.
January RevPAR increased by 25% over the prior. The increase was made up by the $90 increase in transient rate and a 3% increase in room nights. 2017 growth pace is up approximately 15% coming primarily from increases in ADR and similar to trends witnessed at Boston Park Plaza there where mixing of group client tell as a slower process than is the case with transient demand, but overtime we expect it to result in a more profitable customer that has a higher food and beverage contribution.
Together these two hotels are expected to deliver outsized RevPAR growth in ‘17 and produce combined EBITDA that is $16 million greater than they did in ‘16 excluding the impact of Marriott cash flow guarantee.
Now I’ll shift gears and talk little bit about our current investment environment and our capital allocation strategy. As you know we have said repeatedly since early 2015 that we will more likely than not to be a net seller of assets. Including the recently announced sale of the Fairmont Newport Beach for $125 million, we have sold approximately $735 million of assets over the past 18 months at a weighted average trailing EBITDA multiple of over 22 times.
Given our significant cash balance and access to multiple forms of reasonably price capital, our appetite for acquisitions of high quality real estate has increased. We continue to look for and underwrite hotel investments although we were not alone and the level of competition for acquisitions has increased as well.
While acquisitions for Sunstone have become more in focus, it is important to note that we are likely to continue to sell hotels that no longer meet our investment criteria or hotels that we can achieve a price well in excess of our internal valuation.
While we cannot promise anything we hope that 2017 is active both buying and selling hotels resulting in a higher quality portfolio, earnings growth stemming from our significant liquidity position while at the same time, maintaining significant financial strengthen and optionality.
In summary, our portfolio is well positioned to deliver outsized relative earnings growth in ‘17 particularly with the anticipated contributions of our repositioned Boston and Wailea hotels. And our low levered balance sheet, material investment capacity and access to reasonably priced capital position us well to increase earnings with disciplined external growth.
With that let me turn the call over to Bryan for more details on various capital transactions, as well as additional details regarding our 2017 earrings guidance. Bryan, please go ahead.
Thank you, John and good morning everyone. I would like to start by reviewing the financing transactions that we have executed since the beginning of the fourth quarter. In December we completed a $240 million private placement of senior notes, which have a weighted average interest rate of 4.74% and staggered 9 and 11 year of maturities.
The notes funded in January of this year and we utilize the proceeds along with cash on hand to fund their early repayment of two mortgage loans totaling $242 million and which together has an average interest rate of 5.58%. We expect to generate over $2 million in annual run rate interest savings from these transactions.
In the fourth quarter we also issued approximately 3.6 million shares of our common stock for approximately $55 million for gross proceeds under our at the market common equity offering program. Including the impact of the above transactions and taking into consideration the net proceeds received from the sale of the Fairmont Newport Beach and the payment of our common and preferred dividends our pro forma unrestricted cash balance as of the fourth quarter was approximately $440 million.
As of the end of year we had approximately $1.2 billion of consolidated debt and preferred securities outstanding on a pro forma basis. Following the completion of our recent financings we have extended the weighted average term to maturity of our in place debt from four years to six years and decreased our weighted average interest rate to 4.17%.
Our variable rate debt as a percentage of total pro forma debt stands to 22% and 43% of our debt is now unsecured. We have - we have 22 unencumbered hotels that collectively generated $240 million of EBITDA in 2016 and nearly 70% of our total 2016 property level EBITDA is now unencumbered.
In addition to our cash on hand, we have an undrawn $400 million credit facility and no debt maturities before August 2019. Our balance sheet is as strong as it has ever been and we retain considerable flexibility to take advantage of opportunities as they present themselves.
Now turning to first quarter and full year 2017 guidance, a full reconciliation can be found on page 22 of our supplemental as well as in our earnings release. For the first quarter, we expect total portfolio RevPAR to increase between 2.5% and 4.5%. We expect first quarter adjusted EBITDA to be between $61 million and $64 million and adjusted FFO per diluted share to be between $0.19 and $0.21.
For the full year, we expect total portfolio RevPAR to grow between a 0.5% and 3.5%. This guidance reflects all 27 of our hotels and we currently estimate that the Wailea Beach Resort will contribute 150 basis points to 200 basis points of the total portfolio growth as the hotel benefits from the recently completed renovation.
Our full year 2017 adjusted EBITDA guidance ranges from $306 million to $330 million and our full year adjusted FFO per diluted share ranges from $1.09 to $1.19. Similar to the approach we took in late 2016, which proved to be somewhat conservative; our 2017 guidance assumes a group’s slippage percentage slightly below that of the historic average. Furthermore, our RevPAR does not assume a meaningful acceleration in business travel.
Now turning to dividends, our Board of Directors has declared a $0.05 per common share dividend for the first quarter. Consistent with our practice in prior years, we expect to continue to pay a regular quarterly cash dividend of $0.05 per share common stock throughout 2017 to the extent that the regular quarterly common dividend for 2017 does not satisfy our annual distribution requirements, we would expect to pay a catch-up dividend in early 2018 that would generally be equal to our remaining taxable income.
In addition to the common dividend, our Board has also approved the routine quarterly distributions on both outstanding preferred securities.
With that I’d now like to open the call to questions. Percevia, please go ahead.
[Operator Instructions] And we'll take our first question from Smedes Rose with Citi. Your line is open.
Hi, good morning. I wanted to ask you just two quick questions for - you gave some guidance around your expectations in Hawaii, and think you said $16 million of incremental EBITDA from both the Boston and Hawaii assets, but how do you just think about the ramp at that hotel. I mean RevPAR was very strong, but margin was relatively weak, which I think is pretty cyclical, but how long do you think it would take to get fully sort of stabilize there from now?
True. Good morning, Smedes. Generally a property like that we're looking at 18 months to 24 months. And so we believe as we said in prepared remarks that the transient will come quicker, group will take a little bit longer, but what we have seen there initially gives us hope that we'll actually ramp little faster than that.
I’ll turn it over to Marc Hoffman.
Yes, Smedes, good morning. We're very pleased on the transient side and the group side, I think given the nature of this complete repositioning similar to Boston, we are investing in heavy training with the manager, lots of things around the customer really to set the goal, our trip advisors scores have just gone up incredible, the resort now is the number one ranked resort within all of Marriott and previous Starwood resorts among Marriott. So keeping the positioning high will help drive long-term rate and profitability.
Thanks. And then John, just as you look at your portfolio now and you guys have talked about maybe looking at some acquisitions and pursuing and I assume some more dispositions as well, what sort of percent of your portfolio now do you sort of view as core and what percent would you all other things being equal would you like to be able to kind a turn over?
Very good question Smedes. I would say as we pursue a strategy investing in long-term relative real estate. When we look at our portfolio the top portion of our portfolio where most of our asset value resides. It's more than half of our portfolio, but when you take a look at actual value it's much more significant than that. And many of you have heard me say before it’s just our investment not current market value, but just our investment and how as three acquisitions of Boston, Hyatt Regency and Wailea our investments of $1.1 billion.
When I take a look at the for example the bottom third of our portfolio that bottom third of our portfolio makes up roughly by our math call it 10% to 15% of total asset value. And so we are very heavily weighted and we can do this in our supplemental and taking a look where real asset value is. But I think over - as we've been doing, overtime I think what you'll see us do a shift out of many of those assets at the bottom portion of our portfolio. Although keep in mind that the total value there isn't as significant as our top assets.
Okay, that's helpful. Thank you.
Thank you. We'll go next to Shaun Kelley with Bank of America. Your line is open.
Hey, good morning guys. John just wanted to see if I could dig in a little bit deeper to sort of your core trend trying to exclude some of the moving pieces about what's going on with Wailea and Boston to some extent, when we kind of back into at least high level numbers around that. It seems to imply probably about a core EBITDA decline year-on-year maybe somewhere in the low-single-digits between 3% and 4%.
I'm curious if; A that sort of drives with the math or numbers that you guys are looking at. And then B, it seems like with what we're seeing with some of the peers this morning they're probably on similar RevPAR growth doing like seeing a slightly lower decline in that. And I'm wondering if there are any specific issues to SunStone be it property tax or anything else or it's just general conservatism to kind of bridge a little bit of that delta.
Good morning Shaun. It's Bryan. I'll take the first part of that. Looking at our guidance range and last year we used the 300 basis point range. We felt that with the uncertainty that's out there now that that wider than average range, I think the majority of the group is 200 basis points range that it just was wanted again based on the uncertainty.
And as we said in the prepared remarks based on what we saw in the fourth quarter we really haven't increased our expectations based on that one quarter of stronger than anticipated growth. It takes longer for that to work its way through the system to be able to really have confidence that that will be something that will continue. And so if we see that trend continue into Q1 then the potential of the wider range and the potential there being some conservatism in those numbers is quite possible.
Again I think we need to see some time for it to work out to either tighten that range or change the outlook again not enough time has passed. As far as one-time expenses, going through the larger items real-estate taxes our expectations is low single-digit 3% to 5% growth in that.
This year no real big one-time hits salaries and wages and benefits will be up as you would expect comparable to others. Heat, light and power something that we have - and energy expenses something that we've had some success with some investment over the years. We're forecasting up that proven to be down in prior years.
So it will depend, but if we have a good year with no surprises or negative surprises on the real-estate tax and insurance front the margin performance could be slightly better.
Q - Shaun Kelly
Great, okay. Thanks for that Bryan. And then I guess my second question just sort of on the Wailea ramp I am just sort of curious on the overall Hawaii backdrop at this point, sort of heading into 2017. We know it’s a low supply market.
Kind of what’s your - and I believe your competitor this morning or a peer this morning was also calling out some strength now. I mean just what’s your high level kind of macro view towards Hawaii when we sort of weigh strong dollar and typically how much that might mean to Maui versus no supply and sort of a broader probably a pretty strong target market coming from California?
Thanks. Shaun I will speak to the operations opportunity, I’ll let John talk to the dollar. Obviously no supply, great airlift pricing the continued low fuel cost for airlines has resulted in really all-time low pricing of flights from the predominant markets, which is West Coast typically in Dallas and Chicago. The volume of business also in the larger from the outer Irelands is very strong we have very positive signs and believes that will continue and group coming into Wailea when you look at demand 360 and travel click for the year is also very strong.
Yes, it’s John here. When you take a look at Maui you have to remember that Maui is a little different than visitation that goes to Oahu and that is while Oahu has a very meaningful inbound travel from Asia.
The island of Maui partially because of the length of the air strip and also just because of some of the amenities are different than key to Oahu the visitation firm United States represents over 75% of total visitation, significantly more than you see in Oahu and some of the other islands in fact the largest inbound international visitation is actually from Canada.
And so as Marc said, the island of Maui is actually been very strong we expect it to continue to be strong, we have seen significant increase in airlift particularly from San Francisco airport. And we feel very good about not only the island itself where we see it now, but also our ability to successfully execute our business plan, which was as many of you have heard me say by the worst house on the best street and fix the house. And just close the rate gap between where the hotel was performing and where the other hotels that sit immediately adjacent to us are performing and have been for some time.
So thus far as Marc said we are encouraged by our recent results and that are actually better than our expectation. So a lot of work by Marc and the entire team from that asset and thus far we’re enthusiastic.
Thank you very much.
Thank you. And we’ll go next to Chris Woronka with Deutsche Bank. Your line is open.
Hey, good morning, guys. Bryan, I guess first a housekeeping question for you. Thanks for giving us the impact of - estimated impact of Wailea. But on the first quarter can you share that same difference in terms of RevPAR and also maybe the margin difference for the whole year?
Yes for Q1 the Wailea impact on the portfolio is roughly 80 bps for RevPAR.
Full year we gave you that range on the margins it’s around let me - if you have another question, let me look at one other thing and then I’ll get back to you on that.
Sure. I guess maybe a question for John. John, we've heard you guys are probably the third hotel REIT call this morning where we're hearing about increased appetite for acquisitions. And while stock buyback authorizations are in place, they're not really being carried out.
So I guess the question is does it necessarily mean a change in view on the cycle or does this have more to do with cost of capital? And the second part of that would just be are you willing to do something on a disruptive kind of like you did in Boston and Wailea now or is that different versus kind of when you started those two?
Yeah. Chris, good morning, a few questions there. I think that it’s a very good question about whether or not in this cycle we are seeing maybe an extended cycle and I think that tends to be the consensus view now and the biggest change since the presidential election.
Clearly share price increase is refocusing people’s attention on acquisition, whereas as we talk many times in the past, it was difficult to fund an external growth strategy considering most of the hotel REITs were trading at fairly notable discounts to net asset value.
If you remember back in the early part of ‘16 I mean several of us were trading at what most of us thought were to 20 plus percent discount to NAV. With a significant increase in share price, I think it shifted people’s focus as I said earlier more to acquisitions. However I think we all need to be mindful or at least we are mindful that no matter how you look at it, even if you believe there are extra innings in this cycle, were still later cycle. And that has to be taken into your calculus when buying long term real estate.
So as I said in the prepared remarks, we endeavored to acquire Robert Springer, our Chief Investment Officer and team and the rest of us are actively underwriting acquisitions. And as I also said, it is a competitive market. We have seen our REIT brethren show up at many of the hotels that we've been looking at.
So it will be interesting to see how this all plays out over the next year particularly with the backdrop of volatility in both operating fundamentals and our cost of capital.
Hi, Chris, the impact on margins on the full year from Wailea would range from about 40 bps to 70 bps.
Okay. That’s great very good, thanks guys.
Thank you. We'll go next to Lukas Hartwich with Green Street Advisors. Your line is open.
Thanks, good morning guys.
I was just hoping, you could touch on why you tap the ATM given the company sizable cash balance?
Sure, very good question. We access the equity markets in December following an increase in our share price. Despite already having a pretty notable cash balance as we believed then as we believe now that we are likely to require high quality real estate in the medium to near-term. Having that cash on hand and having access to that significant buying power, we believe actually makes us a far more creditable buyer within this marketplace, because we're able to do things like waive financing contingencies, which buyers today are taking a fairly hard line approach against.
I’d also suggest to you that in December, we were unsure of whether or not the Fairmont Newport Beach would actually close for various reasons. So clearly Lukas we are sitting on a much higher cash balance than would normally be the case. However given certain things that are worth considering, we thought it was prudent and we'll endeavor to recognize the earnings potential of that cash for the benefit of our shareholders.
It’s helpful. And kind of along the same lines, how does the Company think about the right cash balance? Do you guys have an explicit target or is it more organic than that?
No, it’s probably a little bit more art than science, Lukas and the good thing is - I think that that would be a far greater focus having a specific cash balance if we were more highly levered and if we had more significant near-term debt maturities. The simple fact of the matter is we don’t have a debt maturity until August ‘19 we can defend any one of our notes coming due, which isn’t for a long time where we’re producing free cash flow.
We always have the ability should we get for some reason the operating fundamentals deteriorate. We could make modest modifications to CapEx so we have a lot of great points. So I would say particularly given all the covenant room and our credit facility our relationship with our bank group which is Sterling, we can actually go down to pretty low cash balance to operate the company without taking on I’d say any material risk.
That’s really helpful. And then lastly it looks like you rebranded your Hyatt in Chicago, can you talk a little bit more about that and did you receive any incentives?
Chris this it’s Mark Hoffman thanks. The rebranding of Hyatt Chicago was really an internal issue among Hyatt. As you know they created Hyatt centric as a way to differentiate between Hyatt and Hyatt Regency and they basically did away with the Hyatt brand. So core urban Hyatt unique locations became Hyatt’s centric and the remaining Hyatt’s became Regency, Hyatt did pay for all of the cost related to that i.e. signage, uniform changes, amenities that kind of stuff and we continue to be pleased with that hotel the way it works.
Great, thank you.
Thank you. And we’ll take our next question from Thomas Allen with Morgan Stanley. Your line is open.
Hi. You gave some positive commentary just around Wailea RevPAR growth, I think it was up 25% in January and then group production in January. Can you just talk about what overall RevPAR growth was in January? Thanks.
Let’s see Wailea, let’s start this way, in January our portfolio - total portfolio RevPAR was up 8.1%, without Wailea it was 6.9% keep in mind though that we had significant benefit from inauguration. When you take a look at - if you backed out Wailea and our DC Renaissance, Baltimore and Tysons our portfolio was up about 2.5%. So in January Wailea was…
Wailea was up about 25% in January, the DC as John said because the inauguration DC was ranging - that region was up from low teens to DC Ren was over 50% up for the month.
Okay. So ex-DC and Wailea, January RevPAR is up 2.5%. Fourth quarter RevPAR was up 1.6% and significantly outperformed your expectations. Why not more optimistic about 2017 RevPAR growth?
Yes Thomas as I said it’s too early, we have seen an uptick we’ve seen an uptick clearly in certain group elements of our business, we’ve seen an uptick in ability to move transient pricing, but keep in mind we’re talking about a couple of months of data points maybe two. Given how volatile this business is and what we continue to believe a volatile world we’re going to take a wait and see approach in terms of making any upward changes in our guidance.
Helpful, thank you.
Thank you. We’ll take our next question from Ryan Meliker with Canaccord Genuity. Your line is open.
Hey good morning guys. Good morning out there. I wanted to piggyback off I think it was you Lukas' question earlier regarding the ATM issuance in December. I understand that you weren't sure about the Fairmont closing then. But even so, you still had from your press release about $380 million in cash on-hand. Adjusting for the equity issuance, you're still talking over $320 million in cash in undrawn credit facility.
So I'm just trying to get a better understanding of what prompted you guys to pull the trigger on the ATM. Was it just that you thought the pricing was attractive? Or was there a deal that you were really close to getting that for one reason or another didn't materialize as opposed to necessarily something in the near to medium terms?
So I thought the cost of that equity was reasonable. But we continue to work on various initiatives. If we knew we had absolutely no chance of deployment we wouldn't have raised it. We're not in the cash business we're in the hotel business. But we are endeavoring to put that to work without the cost of equity was reasonable. And as our typical business practice we don't really talk about much until it occurs.
No, which I understand so I guess to ask another way is there something - is there a specific transaction as that capital is raised for?
To be determined.
Okay, fair enough, that's helpful. And then - I am just trying to get a better understanding of how you’re thinking about raising equity at price - just my fear as it puts a little bit of a ceiling on the stock if equity is being raised without a particular use of proceeds. So hopefully we'll get some light shade on that use of proceeds in the near-term.
And then I guess the one other thing I wanted to touch upon was excluding Wailea just trying to get a better sense of kind of how you think your portfolio is positioned relative to the broader market. I understand that you've got some conservative guidance assumptions and I think a lot of that makes sense and it's prudent.
Are you expecting excluding the Wailea impact for your portfolio to come above, below, inline the major market performance this year? Major market performance being up in the year based on what you've talked about with economic growth and uncertainty in the administration, et cetera.
So what we've heard from the two competitors or two fellow REITs that have announced. I would say that excluding Wailea we’re generally in line. When you take a look at our RevPAR guidance of 50 basis points to 350 basis points and some just quick math Bryan had talked about 150 to 200 basis points of Wailea just take-off 150 for simplicity we're at minus 1 to possibly 2 using a slightly wider range.
I think that's fairly comparable to at least the headline numbers that I heard from our friends at DiamondRock and Host. Although I will tell you I had not dug into their information. But it seems like the headline numbers are pretty close.
Now that makes sense. I only asked because they are close, but you guys seem to have materially lower supply growth across your portfolio than these other guys don’t.
That I can't really comment on their supply numbers. Keep in mind that we have taken a fairly dim view for example at San Francisco. I think there are some charter expectations out there that RevPAR could be flat in San Francisco and that's not something that we believe is the case just given the changing dynamics at Moscone. So there is just where my point of bringing that up there is a lot of things that bubble up into those numbers. We're comfortable with where we are.
And then I guess just one last quick one with regards to kind of the outlook for 2017. Not to put you on the spot here John, but I think over the past three years you guys have exceeded quarterly EBITDA guidance for now 12 straight quarters or 11 of the past 12 quarters. And I say exceeded I mean exceeded the high end of the range. Is there anything in terms of how you're guiding in 2017 that is different from how you've guided in the past?
Not really. Brian had motioned we’re - let me just give you a couple of data points. We are assuming a slightly wider than normal slip rate on our groups. We are assuming that the recent uptick in January and I'll say December we're taking a wait and see approach on that. But to our typical rigorous budgeting process where as people from senior management our asset managers attend every budget meeting challenge, work directly, help change, grouping strategies, pricing strategies what have you that's how we come to these numbers. So, I would say that no real change in how we’ve done it over the past several years.
Okay, that’s it from me. Thanks John.
Thank you and we’ll go next to Michael Bellisario from Baird. Your line is open.
Thanks. Good morning, guys.
Just following up on your comment on San Francisco, has your view to the market for 2017 changed at all what are you seeing at your property in terms of pace? And then also what are the risk that you might see that might prevent you from hitting a budgeted number at the property?
So, let me talk first about what our expectations are for I’m sorry hold on one second Michael my let me get the page number first. So, our most recent pace is down mid-single digits at the hotel and that has fallen off fairly meaningfully as time has gone on. I would anticipate the following in San Francisco as there are something to the extent of on a 20 to 25 fewer compressing days coming out of Moscone that the big box hotels will be more competitive in trying to backfill with either in-house group or with transient.
And what our expectation is and what we’ve seen in other markets where something like this has expired is the secondary impact is you generally have a decline in transient rate. Now, we believe that the blow to us should be softer because we do have in-house group somewhat to pull back on albeit the pace is slower. Those that have high transient strategies, I think might incur more difficulties than we do, but we shall see.
Thank you. We’ll go next to Bill Crow with Raymond James. Your line is open.
Hi, good morning guys. John, that was like your commentary on M&A and I think it’s probably timely given the activism that we have seen from some institutional shareholders as well as yesterday’s hostile bid, I’m wonder if that changes your perspective for M&A within the sector as you think forward whether it’s a year or three year or five years?
The specific transaction announce yesterday does little to change our view on M&A. It is something that I think for the industry would be beneficial. I do believe with the right combination it could add shareholder value, I’m surprise roughly 20 years have been in this business that it has not occurred with the exception of potentially if you want to count the apple REIT transactions.
Obviously social this is are an impediment, but given the current landscape I am hopeful that over the next couple of years we could see a bit of M&A that's a gut feel and I don’t have anything to point too. But I do believe that perhaps the industry is at a time where M&A could make more sense.
How do you think about it as a CEO when you see the activism really ramp up over the last few years? Does that change the dynamics of how you think about running the company?
For us no, our Board and management team are highly aligned on this and Bill as you know we regard incredible shareholder friendly. We believe very strongly that a best defense is a great offence and while that might sound cliché we do not have the weapons of master entrenchment, we have a very shareholder friendly corporate governance.
We have good relationships with our shareholders, at the end of the day we know who runs this company and why we run this company is for shareholders. So I feel very comfortable with that stance and if we mess up well shame on us. And somebody has a better idea let him come in. But no, we feel very comfortable with our relationship with our shareholders.
Okay. And I was thinking almost the opposite of that, which is some of the activist might look at you as being someone they could turn to as a partner in shaking things up a little bit?
We’ve looked at things in the past. We’ll continue to look at opportunities whether they be property, portfolio or company. We have the capacity and a lot of optionality. Sometimes those larger transactions I think people overlook some of the material cost related to those transactions, which would be changes in property taxes, transaction taxes, deal costs, those things add up.
But in any case it would be something that we would look at with the right opportunity. But it has to fit in to our portfolio strategy, our balance sheet strategy, we are not just going to grow to get bigger that doesn’t make any sense.
Very good, thanks for the comments. Appreciate it.
Thank you. We will go next to Anthony Powell with Barclays. Your line is open.
Hi, good morning guys.
Hi, just one quick one from me just on leverage and acquisitions, you obviously have a very low net debt to EBITDA ratio, what leverage are you comfortable getting to given the current volatility in the cycle?
It really depends on the cycle and we think of our leverage really more like an accordion. Later on in the cycle we would expected that leverage declines where we are now a little bit higher than where we are now a little bit lower that to us is all in the safe zone, it takes away defense of cost of a potential down turn, it gives us optionality should there be any downturn. I would fully anticipate that if there were or when there will be a downturn that that leverage metric will pick as we take advantage of opportunities.
So it’s - could we at one point see our leverage go up to 5 times, 4.5 times sure. I think at the right stage that’s completely manageable. So again not to dodge the question, but it’s we look at it as something that will change overtime and as a result of industry dynamics.
Alright, that’s it for me. Thank you.
Thank you. And we will go now to Bryan Mayer with FBR and Company. Your line is open.
Thank you. And just to change topics a little bit. John you were pretty vocal last year about how managers were dealing with the pricing kind of on a nightly basis and potentially negatively impacting RevPAR, do you have any updated thoughts on that have they gotten better what are you seeing now?
We are moving in the right direction. There has been endeavors by several of our operators, slowly but surely move to either cancelation fees in certain markets and try to implement strategies that are pushing more room nights to the lower cost avenues of sourcing that demand. And so this is not something that’s going to change overnight. But we had been pleased although we wish it would happen overnight we have been pleased that this has been a great topic of discussion at some of the larger branded operators.
And I am showing, we have no further questions at this time, I’d like to turn the call back to John Arabia for any closing remarks today.
Thank you everybody for the interest in our company. We are around this afternoon, if you have any follow-up questions, greatly appreciated and have a great day.
This does conclude today’s presentation. Thank you for your participation, you may disconnect at any time.
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