SkyWater Technology Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 1, 2023

There are 13 speakers on the call.

Operator

I will now hand over to our host, Amanda Bryant, Vice President of Finance to begin. Amanda, please go ahead.

Speaker 1

Thank you, Charlie, and welcome to Xenia Hotels and Resorts' 3rd quarter 2023 earnings call and webcast. I'm here with Marcel Verbas, are Chair and Chief Executive Officer Barry Bloom, our President and Chief Operating Officer and Atisha Schopp, our Executive Vice President and Chief Financial Officer. Marcel will begin with a discussion on our performance, Barry will follow with more details on operating trends and capital And Atish will conclude today's remarks on our balance sheet and outlook. We will then open the call for Q and A. Before we get started, let me remind everyone that certain statements made on this call are not historical facts or considered forward looking statements.

Speaker 1

These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10 ks and other SEC filings and could cause our actual results to differ materially from those expressed in or implied by our comments. Forward looking statements in the earnings release that we issued yesterday, Along with the comments on this call are made only as of today, November 1, 2023, and we undertake no obligation to publicly update any of these forward looking statements as actual events unfold. You can find reconciliations of non GAAP financial measures to net loss and definitions of certain items referred to in our remarks in the earnings release, which is available on the Investor Relations section of our website. The Q3 2023 property level information we will be speaking about today is on a same property basis for all 32 hotels, unless specified otherwise. An archive of this call will be available on our website for 90 days.

Speaker 1

I will now turn it over to Marcel to get started.

Speaker 2

Thanks, Amanda, and good morning, everyone. Overall results in the Q3 were in line with our expectations. Our demand segmentation mix continues to revert towards pre pandemic levels as business transient and group demand continue to recover. A couple of important renovation projects have essentially wrapped up, and the transformation of the Hyatt Green, Seascastale Resort and Spa on Ginnie Ranch is well underway. And our recently acquired hotels, W Nashville and Hyatt Regency Portland at the Oregon Convention Center reported a solid quarter of earnings contribution as they were among our top performing assets during the Q3.

Speaker 2

For the quarter, we reported a net loss of $8,500,000 Adjusted EBITDAre was $46,300,000 and adjusted FFO per share was $0.26 Same property RevPAR in the quarter was $158.48 a 0.4% increase as compared to the Q3 of 2022. Occupancy increased 70 basis points, while average daily rates decreased 0.6%. Our results were meaningfully impacted by 3 of our properties undergoing significant renovations in the quarter. This included the comprehensive renovation at the Kimpton Hotel Monaco, Salt The guest rooms renovation at Grand Bohemian Hotel Orlando and the transformative renovation at Hyatt Regency Scottsdale. As Barry will discuss in more detail in his remarks, the Salt Lake City renovation has now been completed.

Speaker 2

The Orlando project will be complete in the next several days And the Scottsdale project is progressing as planned. Excluding Hyatt Regency Scottsdale, RevPAR increased 4% as compared to the Q3 of 2022, highlighting the impact this project had on our results in the Q3 and will continue to have in the near term. As compared to the Q3 of 2019, for the 29 hotels we currently own that were open at that time, excluding Hyatt Regency Scottsdale, RevPAR was down 1.1 percent in the 3rd quarter. For these 29 hotels, occupancy was roughly 11 points below 2019, While ADR was up 14.3%. While expense growth continues to put pressure on bottom line results in the lodging industry, Margin contraction for our portfolio moderated in the 3rd quarter.

Speaker 2

S hotel EBITDA margin on a same property basis declined by 169 basis points compared to the Q3 of 2022, which was in line with our expectations. Excluding Scottsdale, Margins contracted just 60 basis points, which is a significant improvement compared to the 2nd quarter margin decline. Recall that property level expenses in the Q3 of last year started normalizing as many of our properties filled open positions And resume services as the year progress. Turning to our individual markets. In the Q3, the strongest RevPAR growth in several markets that are more dependent on business transient and group demand.

Speaker 2

Houston, Dallas, Portland and Nashville Reported double digit RevPAR growth, while Pittsburgh and San Francisco experienced high single digit RevPAR growth. Due to renovation disruption, Phoenix and Salt Lake City were our 2 weakest RevPAR markets in the quarter, while several leisure oriented markets, including Napa and Savannah Experienced mid teen percentage RevPAR declines. We are clearly seeing signs of leisure demand normalizing However, our portfolio has always benefited from a balanced mix of group business transient and leisure demands and we are continuing to see the gradual shift back through our pre pandemic segmentation mix. Group business remains a bright spot. Group room revenue in the Q3 was up a little over 3% over the Q3 of 2022.

Speaker 2

And excluding Scottsdale in both periods, our group room revenue was up about 9%. We continue to see meaningful improvements in group business at our important group oriented hotels in Orlando, Portland, Atlanta and Dallas. By way of reminder, we estimate that group has Group revenue pace for full year 2023 It's up about 13% versus last year for our same property portfolio and up about 16% if we exclude Scottsdale, Where the meeting space is now mostly unavailable. Group ADR for full year 2023 is up about 4%, Again, excluding Scottsdale. Atish will provide an early look into our 2024 group page during his remarks.

Speaker 2

Business trends and demand continued to improve during the Q3. Overall, occupancy improved on Mondays, Tuesdays Wednesdays as compared to the Q3 of 2022, while weekend occupancy was down slightly as compared to the same quarter last year. 2 of our 4 strongest RevPAR growth markets reflected results from our most recent acquisitions, I'd like to see Portland Edu Oregon Convention Center and W Nashville. With RevPAR increasing by 26.8% and 17.3% respectively at these hotels for the quarter. Both properties are benefiting from significant growth in group business as they continue on their path towards stabilization.

Speaker 2

For 2023, group room revenue on the books at both properties has increased more than 40% over 2022 levels, Driven by solid increases in room nights. Business transit production is also driving growth as both properties increased volumes with important corporate accounts in recent months. Our other top performing markets for the quarter were both located in Texas, where the Houston and Dallas markets Reported 3rd quarter RevPAR growth of 25.2% and 14.2% respectively. Our hotels in these markets not only drove standing Q3 results, but they are also well positioned to capture additional growth in the coming years because of favorable market dynamics And important capital investment made in recent years. Overall market fundamentals reflect a favorable supply and demand backdrop.

Speaker 2

Texas continues to be a high growth state, both in terms of population growth and business incubations at relocations. Supply growth through 2025 in our specific submarkets The Dallas CBD submarket is expected to peak at 2.3%, the Houston North Woodland submarket at 2.7% And the Houston Galleria submarket is expected to see no new supply over the next 2 years. In terms of earnings contribution, our Houston properties peaked in 2015 and since that time have successfully broadened their base of business and reduced reliance on citywide conventions. We also invested a significant amount of capital into our 3 Houston hotels leading up to and through the pandemic. The 2 Westins received about $50,000,000 in capital, mostly by renovating and upgrading guest facing areas.

Speaker 2

And in 2020 2022, we invested approximately $12,000,000 in additional capital expenditures at Marriott Woodlands, primarily on significant improvements to guest rooms and guest bathrooms. We are pleased to see the benefits of these investments as the market continues its recovery from the pandemic and as economic activity in the region continues to improve and despite the significant capital expenditures we have made into these hotels during our ownership period, Our overall investment basis of approximately $360,000 per key on average for the 3 hotels remains attractive, Especially given their excellent locations, high quality and extensive meeting facilities and supporting amenities. I would now like to turn to our Scottsdale project. As I mentioned earlier, this transformational renovation is progressing as planned from a schedule and cost perspective. While the disruption to our short term results is significant, this disruption also continues to be in line with our expectations.

Speaker 2

As we anticipated, demand in the Phoenix Scottsdale market has softened a bit this year, particularly after a very strong first quarter that was aided by the Super Bowl in early February. The market is experiencing similar signs of moderating leisure demand that we are witnessing in other markets. As we indicated when we initially announced this transformational renovation, our strategy revolves around further optimizing the demand segmentation mix at the resort and being able to drive greater and higher rated group business. We also are aiming to create an upgraded experience It will allow the resort to compete more effectively within its luxury competitive set for a higher rated corporate transient and leisure demand. This competitive set includes a number of resorts that have also received significant capital investments

Speaker 3

in recent years. The expansion of

Speaker 2

our meeting space, the significant upgrades to our pool complex, the re launching and revitalization of our food and beverage amenities, the The substantial investment in our upgraded rooms products and the ultimate up branding to the Grand Hyatt Resort are all important components of this transformation. When we initially discussed this project, we indicated that we believe that the record 2022 results at the resort We're driven by an unusually high level of post pandemic domestic leisure demand as well as expenses that were well below normalized levels. We also spoke about viewing 2019 as a more normalized year, both from a demand segmentation perspective and earnings base for the property. Given the resort's aging facilities and an expected normalization of leisure demand in the U. S.

Speaker 2

Overall and the Phoenix Scottsdale market in particular, We completed an extensive analysis of long term supply and demand trends, the competitive landscape and the challenges and opportunities that the resort presented. Everything we are seeing in the market this year has further increased our confidence in the decision we made to commence this transformational renovation and operating to a grant hired from both a scope and a timing perspective. The Phoenix Costco market continues to be very attractive for all segments of hotel demand, which will be bolstered by the expected economic and population growth With a well located and upgraded and expanded Grand Hyatt Resort, We believe we will be able to compete very effectively in the Scottsdale Luxury Resort market. And as a result, We expect the resort to grow earnings significantly over both the 2019 pre pandemic peak year and the outsized leader driven results we achieved in 2022. As a reminder, we have a relatively low investment basis in the resort and we will continue to do so after making this approximately $110,000,000 additional investment.

Speaker 2

Our anticipated gross investment basis of less than $700,000 per key Upon completion of the project, it's especially attractive when compared to recent sales of comparable resorts. We remain extremely excited about the resort's future and continue to believe strongly that this project will be a meaningful driver for portfolio earnings growth in the years ahead. Despite a lot of economic and geopolitical uncertainty right now, the year has unfolded largely as expected as it relates to our portfolio performance. While we have been impacted by substantial renovation disruption as anticipated, We're optimistic that our continued investments in the portfolio will drive attractive returns. Atish will provide additional details regarding our revised full year 2023 outlook.

Speaker 2

We have slightly lowered the midpoint of our projected Adjusted EBITDAre range to reflect recent demand trends. However, we continue to believe that our portfolio is well positioned to outperform in the years ahead, given its high quality, excellent locations, diversity of demand mix and recent and ongoing capital investments. I will now turn the call over to Barry, as he will provide more detail on our portfolio's performance and an update on our capital expenditure projects.

Speaker 3

Thank you, Marcel, and good morning, everyone. As Marcel indicated in his remarks, the leading markets in terms of RevPAR growth in the quarter Include many of our hotels that cater to group and business transient customers, supporting our view that the recovery has extended beyond Leisure Reinient properties. As expected, results in the 3rd quarter reflected renovation impact along with challenging year ago growth comparisons. The quarter began with occupancy of 63.7% in July With an ADR of $245.01 resulting in RevPAR of $156.12 a 1.2% increase compared to July 2022. August occupancy was 62.6 percent with an ADR of $237.23 resulting in RevPAR of $148.54 A 2.1% increase compared to 2022.

Speaker 3

The strongest month of the quarter, as expected, was September with occupancy of 65 percent at an ADR of $263.51 resulting in RevPAR of $171.18 However, this represented a 1.9% decline to September 2022. Excluding Hyatt Regency Scottsdale, same property RevPAR increased 4% in the quarter as compared to the Q3 of 2021. Similar to last quarter, average daily rates at our same property portfolio Moderate in the Q3, declining 0.6% as compared to the Q3 of 2022, which have grown substantially over the Q3 of 2021. As expected, rate declines at some of our leisure orient hotels in the 3rd quarter exceeded that of our same property portfolio as compared to the Q3 of 2022. However, rates at these properties remain well below well above 2019 levels.

Speaker 3

For instance, rates in Key West, Napa and Savannah were approximately 26%, 21% And 12% above Q3 2019 levels respectively. Same property occupancy for the Q3 improved by 70 basis points compared to the Q3 2022. Most of this improvement was driven by higher mid week occupancies as weekend occupancies declined slightly as compared to last year. Reflecting our commentary regarding further opportunity for recovery, particularly in the corporate segment, for the 29 hotels we owned at the time and excluding Hyatt and Dale, Mondays through Thursdays are still down approximately 16% in occupancy from 2019 levels, while weekend occupancies are down approximately 11%. We are continuing to see rate growth due to compression, particularly on Tuesday and Wednesday nights, but are seeing some softening in rates on weekends.

Speaker 3

Business from the largest corporate accounts across our portfolio continues to improve year to date, but we estimate the room night demand is still down about 20% from 2019 levels. We continue to benefit from healthy group momentum with pace being driven by increases in both room nights and rate. Including our 2 most recent acquisitions, Hyatt Hyatt Regency Portland and W Nashville, but excluding Hyatt Regency Scottsdale, group room revenue on the books for full year 2023 is currently about 16% ahead of last year and About 6% ahead of 2022 levels for the Q4 of 2023. We believe there is continued opportunity for further recovery and growth in group business, even as we close the gap to 2019. Our current group room revenue on the books for 2023 is about 3% behind 2019 levels, excluding Scottsdale in both periods.

Speaker 3

Now switching gears to expenses and profit. 3rd quarter same property hotel EBITDA was $51,200,000 A decrease of 7.9% on a total revenue decrease of 0.8% compared to the Q3 of 2022, resulting in 169 basis points of margin erosion. Excluding Hyram and Shey Scottsdale, margin declined by just 60 basis points. This decrease in hotel EBITDA margin in the 3rd quarter was consistent with our expectations. The margin declines would moderate in the second half of the year as we lap the lower staffing levels that were in place last year.

Speaker 3

Although Rooms and Food and Beverage department margins decreased in the quarter as compared to the Q3 of 2022, salaries and benefits stabilized And over time was significantly reduced as staffing levels normalize. A and G expenses grew a little over 1% compared to the prior year And property operations and maintenance expenses declined by approximately 1%. Utility expenses grew by approximately 6%. Now turning to CapEx. During the Q3, we invested $35,500,000 in portfolio improvements, bringing our year to date total to $69,500,000 In the Q3, we continued guestroom renovations at the Grand Bohemian Hotel Orlando, Which is expected to be completed in the next few days.

Speaker 3

Earlier in the year, we completed the comprehensive renovation of all public spaces, including meeting space, lobby, Restaurant, bar, Starbucks and the creation of a rooftop bar. At the Park Hyatt Aviara Resort, we completed a significant upgrade to the resort's fitness amenities and spa, Which reopened as a branded Miraval Life in Balance Spa. And finally, at Kimpton Hotel Monaco Salt Lake City, We completed the comprehensive renovation of meeting space, lobby, restaurant, bar and guest rooms in the 3rd quarter. The $110,000,000 transformative renovation and up branding of the 491 Room Hyatt Regency Scottsdale is underway and proceeding as planned. Major components, including the meeting space expansion, pool complex and guest rooms have all been contracted in line with budgeted levels All phases remain on track to be completed by the end of 2024.

Speaker 3

Our expectation for total capital expenditures this year are now at a range of $120,000,000 to $130,000,000 A reduction of $5,000,000 to the midpoint due to timing of deposits and cash flow. We are excited about the projects we have underway and look forward to their completion. Pat, I will turn the call over to Atish.

Speaker 4

Thanks, Barry. I will provide an update on our balance sheet and discuss our guidance. First on our balance sheet, At the end of the Q3, our leverage ratio was about 4.7x net debt to EBITDA. All of our debt is at fixed rates. The quarter end interest rate was about 5.5 percent and our next debt maturity is in August 2025.

Speaker 4

We continue to have a fully undrawn line of credit that together with our unrestricted cash reflected approximately $670,000,000 of liquidity@quarterend. During the quarter, we bought back just over $5,000,000 of our senior notes in the open market at roughly 1% below par. In addition, we continue to repurchase shares. Year to date through today, We've repurchased 6.5 percent of our outstanding shares at an average price of $12.72 per share. We have approximately $73,000,000 remaining on our Board repurchase authorization.

Speaker 4

We paid a $0.10 per share dividend in the 3rd quarter. On an annualized basis, that reflects a yield of approximately 3.4% on our stock. It also reflects a payout ratio under 40% projected FAD based on the midpoint of our FFO guidance. 2nd, I will turn to our full year outlook. We have lowered our expectation for RevPAR growth by 50 basis points to 4.5% at the midpoint.

Speaker 4

While 3rd quarter results were in line with prior guidance, our revised outlook reflects tempered 4th quarter expectations. This reflects lower weekend demand than had been previously expected as leisure demand continues to normalize. And it also reflects the continued improvement in business transient demand, albeit at a slightly more gradual pace than we had previously estimated. On a preliminary basis, we estimate October RevPAR declined 2.3% versus last year. Excluding Hyatt Regency Scottsdale, October RevPAR increased about 2.4% versus last year.

Speaker 4

The impact of the Scottsdale renovation on RevPAR was about 100 basis points higher in October than it was in the Q3. As a reminder, October has historically been the most significant month of the quarter with nearly 50% of our 4th quarter EBITDA earned during the month. As we look ahead to November December, our pace is significantly impacted by the Scottsdale renovation. Transient room revenue pace For the 2 months, it's 2% lower than last year. Excluding Scottsdale, transient pace is up 6%.

Speaker 4

As of the end of the Q3, group room revenue pace for November December was down about 4% versus last year. Again, excluding Scottsdale, pace for the 2 months was up 2%. As to hotel EBITDA margins, We expect them to decline approximately 200 basis points during the Q4 as compared to the Q4 of last year. Excluding Scottsdale, 4th quarter margins are expected to be flat to slightly positive. As to adjusted EBITDAre, we have lowered the mid $4,000,000 to $250,000,000 Our adjusted FFO guidance of $167,000,000 at the midpoint Is $1,000,000 lower than prior guidance.

Speaker 4

This is a result of the $4,000,000 in lower expected adjusted EBITDAre offset by slightly lower interest expense and slightly lower income tax expense. Our G and A expense guidance is unchanged. On a per share basis, we expect FFO of about $1.51 at the midpoint, which is 0 point 5 $0.005 higher than prior guidance due to buybacks since we last reported. Looking ahead to 2024, while it's still early, there are a few data points that we can offer for now. First, on our group outlook.

Speaker 4

As of the end of Q3, we had about 45% of our group revenues for next year Already definite that group room revenues for 2024 is pacing flat. Excluding Scottsdale Group pace is up about 10% for next year. 2nd, on corporate rates. We expect corporate negotiated rates for 2024 to be up in the low to mid single digit percentage range. That's based on preliminary feedback from our operators.

Speaker 4

And 3rd, on new supply growth, across our market tracks, we expect supply growth to be up just over 1% next year Based on our weighted geographic room mix, this is considerably lower than annual supply growth has been over the last few years. While we will not yet be providing 2024 guidance and we'll do so when we report the 4th quarter, We are providing an impact providing an estimate of the impact of disruption from our Scottsdale project. We expect the impact to EBITDA to be about $12,000,000 over the course of next year. By quarter, our estimate is $3,000,000 in the 1st quarter, dollars 5,000,000 in the 2nd quarter, $3,000,000 in the 3rd quarter $1,000,000 in the 4th quarter. By way of reminder, in 2023, The EBITDA impact due to the Scottsdale renovation is expected to be about $14,000,000 By quarter, that was approximately $2,000,000 in the 2nd quarter, dollars 5,000,000 in the 3rd quarter and we estimate it will be approximately $7,000,000 in the 4th quarter, Which we also expect to be the peak absolute level of quarterly EBITDA displacement from the renovation.

Speaker 4

So as we look at next year, we will see the largest year over year net renovation impact in the first half. By the time we get to the second half, We'll be lapping this year's heavy disruption. Despite less renovation disruption next year, we expect EBITDA from Scottsdale property to be lower than in 2023. This is because leisure and group demand were particularly strong during the 1st 4 months of this year, and the property also benefited from the Super Bowl this year. We expect we will undertake some other capital expenditure projects next year that are likely to negatively impact EBITDA Similar to what we've done in any given year, while it's a bit premature to pinpoint that impact As we have typically done, we will do so when we next report.

Speaker 4

I'd like to conclude by mentioning that the company continues to be well positioned With no near term debt maturities, a high quality portfolio and strong relationships with industry participants, including Brands, managers, lenders and others. We're executing and on track on several potential high value projects We expect to continue to drive strong growth in the years ahead. And with that, we'll turn the call back over to Charlie for our Q and A session.

Operator

Thank

Speaker 5

you.

Operator

Our first question comes from Bryan Maher of B. Riley Securities. Bryan, your line is open. Please go ahead.

Speaker 6

Thank you and good morning. Just one kind of area I wanted to address and I don't think you really talked about it much in your prepared comments was You have a pretty formidable liquidity position between your cash and your availability. And we have a marketplace where hotels are starting to be handed back to lenders. I suspect we haven't seen the bottom of that, but would welcome some commentary there. Marcel, how are you thinking about allocating your capital between future buybacks, you've been pretty aggressive this year, and acquisition opportunities over the next 12 to 18 months.

Speaker 2

Yes. Good morning, Brian. To your point, I think we are still in a situation where we're not quite seeing the depth of acquisition opportunities that we expect to see going forward. So particularly as we're looking at our current stock price, we think that there is a lot of value there as compared to Certainly, what we believe the outside value for these properties would be. So it is really a balancing act, frankly, making sure that we Maintain enough liquidity to potentially look at acquisitions when there is more and more interesting opportunities out there.

Speaker 2

But we certainly see a lot of value in our stock currently. And obviously, the 3rd component of that is we do have a good number of Well, at this point, really the bulk going into Scottsdale, but any other CapEx needs that we're going to have over the next couple of years as well, Just to make sure that we maintain enough liquidity to for those kind of high potential projects that we're working on in addition to the buybacks And maintaining enough dry powder for potential acquisition opportunities in the future.

Speaker 7

Okay. Thank you.

Operator

Thank you. Our next question comes from Bill Crow of Raymond James Bill, your line is open. Please proceed.

Speaker 8

Great. Good morning.

Speaker 3

Good morning.

Speaker 8

If you take out Scottsdale good morning. If you take out Scottsdale from the equation, how much does RevPAR have to grow next year In order to have flat EBITDA?

Speaker 4

Well, we're still in the budgeting process, but

Speaker 2

if you take Scott's dot

Speaker 4

of the equation, I think it's probably kind of in the Low to mid single digit range to get to flat EBITDA just based on initial Indications on expense pressures and the rest?

Speaker 2

Yes, I think Barry did obviously get into a little bit of what we're seeing just The overall expenses and growth in expenses, and we are certainly at a much closer level to full staffing than where we were in previous quarters. That's why you're seeing the moderation that we saw on the Q3 too as compared to the margin contraction that we had in the Q2 of this year. So the fact that If you think about that we had 4% RevPAR growth in the Q3 of this year, excluding Scottsdale, And our margins contracted by 60 basis points. I think that leads you to kind of that range that Atishis is talking about.

Speaker 8

Yes. No, that's helpful. Thank you. And then just a follow-up question. Wondering, it seems like Middle of the year, maybe it was a little bit earlier than that.

Speaker 8

We saw this slowdown in the month or in the quarter for the quarter Booking activity, it just things seem to slow on that end. And I'm wondering what you're seeing on the booking window on those short term bookings? Thanks.

Speaker 3

Yes. I mean, I think if you think about 4th quarter pace, Short term bookings are still very much a reality, and I think we're seeing that extend into 2024 as well, where Well, while Atish talked about overall pace for 2024 and where we are, it's pretty heavily front loaded, which we take as a good sign that businesses Is responding quickly, and we're now starting to see properties really push to try to put more business on the books in the last half of twenty twenty four, Quite frankly, it's pretty easy because in most of our large scale group properties, the first two quarters are in really good shape.

Speaker 8

Okay. Thanks. That's it for me.

Operator

Our next question comes from Dori Kirsten of Wells Fargo. Dori, your line is open. Please go ahead.

Speaker 9

Thanks. Good morning. With some time now under the new GMs belt at the W. Nashville, Have you seen a notable shift in operations that you are looking for to Put the hotel kind of back on the trajectory to stabilize yield?

Speaker 3

Yes, I think I would say very much so. We had a very, very good Q3 there in terms of rooms operations, both in terms of the RevPAR the hotel drove in absolute terms as well as Relative to its competitive set, a lot of that managed to flow through the operations as they've taken a new and fresh clean look at Kind of how to optimize the property operationally. And certainly with the amount of group business the hotel has done, which was a big contributor to Q3 As we had expected to be in a much larger component of the business of the hotel as we move forward, banking contribution was also good. The piece that's still a work in progress and not surprising given the amount of time it takes is really looking at the multiple food and beverage outlets in the property and still going back And really working on kind of new marketing and digital marketing and social media plans for each outlet to really think about how we can maximize performance. And we're working on some things we're not really prepared to talk about yet, but that we think we'll certainly Be able to get the property on a better track and certainly more help get us closer to bridge the gap that we still have On the food and beverage outlet side.

Speaker 9

Okay. And I think last quarter you said, maybe the hotel is about a year And where you thought or it might take a year longer to stabilize. Is that still fair?

Speaker 2

Yes, I think that's still fair. And I just I would reiterate what Barry said. We obviously are really kind of undertaking this path of kind of revamping some of the F and B operations here, and it's still relatively early days with the new GM in place. I believe you've seen the property yourself, and you know what's outstanding facilities that we have there, so we are still very confident in kind of the long term prospects for the hotel. Clearly, it is taking a little bit longer to stabilize, but it remains a great market, a great asset, and we're still very excited about the growth prospects there.

Speaker 9

Yes. Okay. Thank you.

Operator

Thank you. Our next question comes from David Katz of Jefferies. David, your line is open. Please proceed.

Speaker 10

Hi, morning, everyone. Thanks for taking my question. I want to, Atish, go back to some of your Prepared remarks. We appreciate the detail around Scottsdale and how that rolls into 2024. I think you did Suggest that there could or would be more projects in 2024.

Speaker 10

And what I'm trying to envision is Whether they could have the same kind of impact as Scottsdale or we start to get into more of No cash flow pivot or harvest mode.

Speaker 4

Yes. Thanks, David. Yes. That comment was really meant to indicate that there are in any given year some projects that we do. We don't expect To do anything next year of the magnitude of the project in Scottsdale, but While I was giving the displacement number for Scottsdale, I'm not really rolling up any and all displacement for next year just given that we're still in the Budgeting process and capital planning mode.

Speaker 4

So that's really what that comment was meant to indicate. Just that there In any given year, we have some other smaller projects. We expect we'll have those next year as well. And we expect those in fact to be similar to the projects we had this year. We had a handful of other projects that we were working on.

Speaker 4

So we likely will have Several other projects next year that we'll work on as well.

Speaker 10

So should I think about those magnitude wise As something order of magnitude similar to what you did this year ex Scottsdale, is that a fair way to Can I think about the outlook?

Speaker 4

Yes, I think more or less. I mean, look, yes, look, we still we don't have a specific number for those projects, And the timing will obviously vary relative to the projects we did this year, namely Grand Bohemian Orlando And the project in Salt Lake. But I think it's probably a fair guess to do that.

Speaker 2

Yes, that's really I'll just add to that, David. That's it really is just, as Atish said, just kind of indicating that There may be some more disruption than essentially the $12,000,000 that he outlined for Scottsdale. If you think about this year's disruption, We've talked about $18,000,000 of total disruption, dollars 14,000,000 of which came from Scottsdale. So there was an additional roughly $4,000,000 that came from some other projects this year. We are just not pinpointing exactly what it is for any additional projects, because frankly, we're still going through the whole process of finalizing capital budgets for next year And really looking at what we may or may not want to tackle next year.

Speaker 2

So we'll as I'm sure you can understand, we'll get into a lot more detail on that as we You are our next earnings call at the beginning of this year.

Speaker 10

Got it. If I could sneak one more Quickly, and I'd appreciate it. One of the other public REITs Announced a transaction recently, and I'm just wondering whether you think the capital markets landscape is better, worse or the same, And whether there's a message in that or not?

Speaker 2

From a capital markets perspective, Maybe you just I don't know if you want to be more specific about what you're asking about exactly what transaction. Are you talking about company wide transactions? Or you're talking about a specific Individual Asset Acquisition?

Speaker 10

Well, I mean, what prompted the question was The Boston asset that Sunstone sold.

Speaker 2

Oh, I have

Speaker 10

to answer. And whether there's a message in that about Receptivity or underwriting conviction and the receptivity of the capital markets, that's what I was getting at.

Speaker 2

Yes. No, thanks for the clarification, David. So from our perspective, I mean, there are still clearly there are transactions being completed and there is interest And well located assets and good assets that are out there. And we know of other transactions that are currently in the pipeline that will also be You probably pretty constructively as it relates to valuations of hotel assets. And I think We all know that interest rates have obviously increased very significantly, and I'm sure you've seen some recent refinancings that have been done that where mortgage rates are in kind of the high 8% kind of range.

Speaker 2

But I think people are underwriting that and probably underwriting some sort of refinance down the road, Hopefully, more attractive levels that gives them confidence in what their long term returns could be. Now that being said, I think The market is still not overly deep for larger size asset acquisitions and both from a Number of assets that are out there and number of transactions that are getting completed, we're still seeing some more deals done at some Kind of the smaller size transactions, I think you're seeing in the larger sizes. But I do think there's certainly interest in the lodging space. And I think part of that is also being driven by kind of looking past these next 6, 12 months and looking at what The supply picture looks like for the space, which is obviously very appealing compared to where we've been historically. So I think that there is certainly plenty of interest in the hotel space overall.

Speaker 2

And obviously, from our perspective, we see A pretty good path forward for growth in a portfolio like ours as well.

Speaker 10

Thank you. I appreciate

Operator

it. Thank you. Our next question comes from Michael Bellisario of Baird. Michael, your line is open. Please go ahead.

Speaker 11

Thanks. Good morning, everyone.

Speaker 2

Just a

Speaker 11

couple of quick clarifications. Just on the good morning. First on the 4th quarter outlook, Sounds like it's all on the top line coming down a little bit. Is that correct? Or are there any incremental expense headwinds that you're also baking into Updated full year guidance.

Speaker 4

No, Mike, I think you got it right. It's really RevPAR driven. I mean, if you look at Everything else, how we're thinking about the renovation impact or the expense Backdrop, that hasn't changed. It's really top line driven and primarily associated with the two things that I mentioned. The demand a little bit lighter on weekends and then BT ramping, but ramping up slightly slower.

Speaker 11

Got it. Just wanted to clarify that. And then just on the 24 numbers for Scottsdale, Just to clarify there, if it's net positive 2 from renovations, but you expect the year over year to be down, is that sort of At least net 3 negative sort of like for like, is that all in the Q1 then or is that going to be spread out more between 1Q and 2Q?

Speaker 4

Yes, it's mostly Q1. That's where we saw kind of pull up more of the strength at least relative to this year. There's a tad bit in the 1st month of Q2, but it's mostly Q1.

Speaker 11

Got Okay. And then just last one for me, probably for Barry here. I think you mentioned meaningful improvement in group performance, group trends in a few of your key markets. Any incremental color You could provide there maybe what's driving that optimism and that upside?

Speaker 3

Yes, I think in part it's a shift Back to like everything else is shifting, it's a little bit of shift back to our more normal group patterns where we're seeing a much more blended mix of kind of corporate group, Association Group and Smurf Group and where that's falling across the year, it's falling in the more traditional places. So you don't have I mean that kind of the big buildup of corporate demand has softened and while that's incredibly lucrative business, It's the shift back to more group of the traditional types we've had. We've talked about before, right? We had this Tremendous pent up demand from corporate and associations typically book further out. So now we're getting that association group to book further out.

Speaker 3

We're getting the high quality Summer business in a lot of resorts that it is sports groups, dance groups, things like that. So it's just a more balanced Group mix across the year, which is ultimately driving higher and better pace both in room nights and in rate.

Speaker 7

Helpful. Thank

Operator

you. Thank you. Our next question comes from Ari Klein of BMO Capital Markets. Ari, your line is open. Please go ahead.

Speaker 7

Thanks and good morning. Maybe just on the balance sheet, with some higher near term CapEx and EBITDA next year impacted by renovations, how high are you comfortable with Leverage, getting to or maybe just where do you think it will kind of peak out at?

Speaker 4

Yes. Thanks, Ari. Well, pre COVID, we have been running the company from kind of this range of low 3 times to low 4 times and that certainly Continues to be kind of our target range and the optimal level for us given the asset profile. That said, there is a lot of recovery potential here over the next couple of years and we pointed to some of that in Prior conversations as well as the materials we posted, so we do expect there'll be natural delevering for the company As we go forward here over the next couple of years given the EBITDA growth particularly from some of the newer investments as well as the CapEx. As we think about next year, I think as we talked about earlier, it is a little bit of a balance here given the level of CapEx we have with other uses That we deem attractive including buybacks.

Speaker 4

And I think where we are leverage wise, roughly speaking is About right. We're north of that low 4 times higher end that I had mentioned. But again, as we look farther out, we think we Comfortably get back into that range. So I would say we're fine kind of in the high fours, Maybe even a little bit higher just given the recovery potential of the business. So hopefully that gives you a little bit of color into how we're thinking about Leverage in the balance sheet in light of what we've got poking in terms of CapEx and How we're thinking about share repurchases and continuing to be active there.

Speaker 7

Appreciate that. And then on the heightened stock sale, curious about how you think about maybe shutting the hotel Held down or if you would consider that in an effort to accelerate the renovation timeline? And if Now, I guess, why not?

Speaker 2

Yes. We obviously looked at that very To see what we thought the right approach would be. And if anything, that phase to do that would have been in the last really in the kind of the last I suppose to going forward. But even with that, we looked at it very closely to make sure that we felt that we were not hurting ourselves Financially in the short term, but also not hurting ourselves with a ramp up if you have to open the hotel back up. And the good thing about this hotel is that you've got Some pretty distinctive areas of the hotel from a guest room perspective, where you can easily do one side of the building and have the other rooms on the other side of the building available.

Speaker 2

And that's what we're working through right now as we're doing the guest room renovation to make sure that we get through the first half of The building first and then have the second half available really when the pool complex is done at the beginning of next year. So It probably is it might be helpful for me to expand on that a little bit because we've obviously talked about this in meetings before, but maybe not quite in as granular a way as we're As I'd like to do now, which is, we really have a strategy of making sure that we can attract leisure business primarily in The first half of next year by having the pool complex complete and by getting the guest rooms completed really here in the Q4 and Q1 of next year And being able to drive the leisure demand into the hotel first, while the meeting space isn't available yet with the expanded meeting space that we're doing. And then over the summer, in the kind of slower periods that naturally occurs anyway, really tackling primarily the F and B operations. So We have a very well thought out process here of how we're staging this whole renovation and trying to Minimize disruption, getting the pieces going as quickly as we can.

Speaker 2

And we feel very strongly that we're not losing a lot of I'm honestly by not closing down the resort entirely, but that we're actually managing through this the best way possible, maximizing our cash flow during this time frame Without really losing any kind of time in completing this process.

Speaker 7

Thanks. And if I can just squeeze one more in, just looking at San Jose, it's obviously a challenged market, but You dipped a little bit from last year with tech companies returning to office. What are you seeing in that market? And how do you think that kind of evolves into 2024?

Speaker 3

Yes. I think one of the challenges there is that While there has been more return tech to office, there have also been significant layoffs. So that has masked a little bit Of the opportunity to grow occupancy in that market. It's also true that when people were not in the office, we actually and it was one of our original strategies from the beginning of COVID Was to attract business from people who were visiting the office, meaning employees who were paying their own way to come into the market To be in the office a couple of days a week, and that business has changed a lot, both as a result of tech layoffs And the result of requirements to be in the office more days has led a lot of people to come back to be more local to the office. We have the Q3 of this year had also Never had a particularly good setup for us in that hotel on the group side, as we continue to work with the adjacent convention center on driving more business into that center, but we had always known that that will So those are kind of the 2 or 3 components that led to a little bit of softening there.

Speaker 3

And the flip side is we have seen rate improvement there through the period As well new period as well, in part because we because I mean, it's not the ideal outcome, but some of that's because We didn't have some of the lower rated group business that we'd ordinarily have lower rated group business we'd ordinarily have in that hotel during Q3.

Operator

Our next question comes from Austin Verschmidt of KeyBanc Capital Markets. Austin, your line is open. Please go ahead.

Speaker 12

Thanks and good morning everybody. I'm curious that the recent softness in leisure demand that you highlighted kind of changed your outlook for this segment at all heading into 2024. And were there any specific markets or hotels across the portfolio that you'd highlight?

Speaker 3

Yes. I talked a little bit in prepared remarks. I mean, where we continue to see a little pullback in both Occupancy and rate are really the key leisure markets we've talked about for a long time now, which are, Napa, Savannah and Key West. Key West, We actually had some lap to renovation last year. So we actually showed growth in Q3 there.

Speaker 3

That was really a result of renovation lapping. Again, as I mentioned in the prepared remarks as well, rates are Incredibly strong in those markets, and we've not seen a lot of rate pressure. I think it's just simply a matter of in each of those markets, if you spent 10 minutes on each of them, which we obviously don't have time for today. Each one of them has their own unique dynamic. NAPA certainly has been impacted by The West Coast and tech slowdown and layoffs and things like that, but we continue to be pleased with the performance In Savannah, despite the year over year decline, Charleston's held up very well in Q3 as well.

Speaker 3

And again, Key West has always been a tremendous market for anyone that's invested there. And so we don't have a particular view in 2024 that we see anything remotely close to the clients we've seen this year. In fact, We certainly hope that the occupancy levels will stabilize back to the more normal levels, albeit at much significantly enhanced rate over 2019.

Speaker 2

And the only thing I'll add to that is that from our perspective, we've been in these leisure markets for a long time. We didn't just jump into these markets in the last couple of years, right? So We're in some really long term proven high demand leisure markets, where we feel very good about the long term prospects And where those will kind of stabilize and normalize. And obviously, very important in our prepared remarks too that we have seen very significant rate growth in those markets even still So it doesn't really change our outlook as it relates to those particular markets. So I think what we're seeing is really What we kind of expected, which is a softening of kind of the overall domestic leisure trends and as Atish pointed out, That is a little bit more significant in the Q4 than we initially anticipated, but it's also not quite being made up by Business transient accelerating as much as we were projecting a quarter ago.

Speaker 2

So it's really kind of the balance of those two Thanks. But we feel good about where we are in those leisure markets. We feel good about the hotels that we have in those markets. And as you know and as I've pointed out a number of times, This kind of gradual shift back is not a bad thing for our portfolio because we do have a very good balance between corporate transients, Group and leader demands, and particularly the strength that we're continuing to see in group is very consistent with what our expectations are It really plays into where we think we're going to benefit over the next couple of years, which is we have assets that are more heavily dependent on that type of business. We obviously did the additional ballroom at Grand Cypress where we're expecting good growth over what we saw in 2017, 2018, 2019.

Speaker 2

Certainly, what we're doing in Scottsdale plays into that where we want to make sure that it's extremely attractive for all three demand segments And where the increased group business that we're going after there is going to be very important for the long term success of the property. So in overall trends in these demand segments, We're not surprised by what we're seeing there.

Speaker 12

Yes, that's a good segue into my next question. I guess with respect to the corporate segment, you referenced the 16% delta in occupancy versus 2019 levels. I guess, how does that compare to the beginning of this year? And Any specific markets where that corporate demand that is underperformed you referenced into the Q4 versus initial expectations or budgets? Like is it any specific hotels or markets or just broad based?

Speaker 4

Well, I think part of

Speaker 2

it is, it's twofold from my perspective, and Barry can jump in as well. But We Orlando, for example, is a component of that. And Orlando was a Grand Bohemian Orlando, which is really a business Transient hotel for the most part and some group element to it, not really very specifically driven by leisure. And that renovation being extended out a little bit, certainly had a bit of an impact in the beginning of Q4 as well. So some of our more business oriented hotels are some of the ones that have undergone some of the renovations this year, too.

Speaker 2

We have seen an improvement in corporate transients As the year has progressed, where you're still seeing where you need to see additional growth is really on the Monday nights and the Thursday nights. Tuesday Wednesday nights are performing very well. Where you're really seeing that delta in the occupancies, it's very much driven by what you're seeing on Monday Thursday nights. And And that is still driven by return to office, more travel by especially the larger corporate accounts that needs to occur on those nights of the week that we haven't quite seen yet.

Speaker 12

That's helpful. That's all for me. Thank you.

Operator

Thank you. Our final question of today comes from Luiz Riccardo Chinchilla of Deutsche Bank, Luis, your line is open. Please go ahead.

Speaker 5

Hey, guys. Thank you so much for taking my question. I was wondering if you could comment on your refinancing strategy acknowledging that you guys have a pretty good rate, it's fixed And effectively you have plenty of liquidity. So any insight on what you're thinking? And perhaps If you would be more inclined to be more conservative in leverage, although I know this I was already asked, but if you could provide like a range, would you feel comfortable in deteriorating fundamental environment?

Speaker 4

Thanks for the question. So on the first part of the question with regard to Refinancings or financings, our next maturity is in August of 'twenty five. So it's quite some time away. I think there are obviously potentially many avenues we could explore for that Debt maturity, and a lot is going to depend on sort of pricing, what's available and attractive. Certainly, the high yield market is one that we could continue to Access and we've got a good track record in that space, but there are other Financing tools we could utilize as well.

Speaker 4

So just a little bit too early to really have a specific strategy laid out, but we do feel I'm particularly confident in the avenues available to the company, and we continue to stay close to the opportunities on that side. So As we get a little bit closer, I think, we continue to monitor it and we'll make some decisions with regard to that, but still almost a couple of years away. And then to the second part of your question really around how we're thinking about the balance sheet overall and leverage level. I would say, As I pointed out earlier, that range of leverage that we had talked about, the low 3 to low 4 times continues to be appropriate for us. And I do think, specifically to your question, look, as we look at the business over the next several years, we do see a lot of upside and we've articulated some of that In terms of EBITDA levels, this business could get to.

Speaker 4

So I think that really is the focus when you think about leverage level for the company, and while there may be some near term headwinds and we haven't obviously provided guidance for next year yet, We're really looking big picture and longer term at where do we want the leverage level for the company to be relative to the growth prospects And the stabilized EBITDA we're expecting from the projects and investments we've made. So I think, I would just keep that in mind as you think about Where we want to take the balance sheet and how we're thinking about the right level of Debt for the company relative to the long term earnings potential of the company.

Speaker 5

Thank you so much for your

Operator

answer. Thank you. We have no further questions registered at this point. I'll turn the call back over to Chair and CEO, Marcel De Bas for any closing remarks.

Speaker 2

Thank you, Charlie. Thanks for joining us this morning. I know we'll see many of you over the next few weeks. Those of you we won't see wish you Good rest of the year, good holiday season, and we look forward to connecting with everyone at the beginning of next year, okay?

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
SkyWater Technology Q3 2023
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