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Earnings call: Xenia Hotels & Resorts reports mixed Q2 results amid renovations

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-04, 11:12 a/m
© Reuters.
XHR
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Xenia Hotels & Resorts, Inc. (NYSE: XHR) reported its second-quarter earnings for 2024, revealing a period of growth and challenges. The company saw an increase in revenue per available room (RevPAR) due to stronger corporate transient and group demand, but experienced some softness in leisure demand. The quarter's net income was $15.3 million, with an adjusted EBITDAre of $68.4 million, and an adjusted funds from operations (FFO) per share of $0.52.

Xenia's most significant project, the renovation of Hyatt Regency Scottsdale, is progressing well and is expected to complete by the end of Q3, with a relaunch as the Grand Hyatt Scottsdale Resort slated for early October. Despite the optimistic outlook on portfolio performance and earnings growth potential, the company has adopted a more cautious stance for the latter half of the year.

Key Takeaways

  • Xenia Hotels & Resorts reported a growth in RevPAR, driven by corporate transient and group demand.
  • Leisure demand showed weakness, impacting overall performance.
  • The renovation of Hyatt Regency Scottsdale is on track, with minimal disruption expected in Q4.
  • Net income stood at $15.3 million, with adjusted EBITDAre at $68.4 million, and adjusted FFO per share at $0.52.
  • Property improvements are planned with a budget of $125 million to $135 million, including $70 million to $75 million for the Scottsdale renovation.
  • The company sold the Lorien Hotel & Spa for $30 million.
  • Xenia anticipates a cautious second half of the year but remains optimistic about overall growth.

Company Outlook

  • Xenia projects a cautious approach for the second half of 2024 but expects earnings growth potential.
  • The company has adjusted its RevPAR growth guidance to 3% and lowered its adjusted EBITDAre forecast by $5 million to $249 million.
  • Full-year capital expenditure guidance increased by $5 million, with interest expense guidance unchanged.
  • The company is optimistic about the recovery in corporate and group rates and expects significant growth ahead.

Bearish Highlights

  • Leisure demand experienced some weakness, contributing to a slight decline in ADR.
  • Markets like New Orleans, Orlando, Nashville, Savannah, and Key West saw weaker RevPAR.
  • Hotel EBITDA margin declined due to increased department costs and slower revenue growth in food and beverage.

Bullish Highlights

  • The group room revenues were up over 5% compared to the same quarter last year.
  • Business transient production in room nights increased by nearly 90% year-over-year.
  • The company is confident in the stabilization and growth of the group business for the future.

Misses

  • The hotel EBITDA margin was slightly lower than projected due to lower margins and slightly below forecast RevPAR growth.

Q&A Highlights

  • Executives discussed the ongoing impact of COVID-19, noting that leisure outlets are still busy and there has been an increase in in-house spending.
  • A shift in the mix of group business has been observed, with associations performing stronger than corporate groups.
  • Marcel Verbaas highlighted potential EBITDA building blocks for 2025, including significant contributions from the Scottsdale acquisition and assets in Northern California and Portland.

In summary, Xenia Hotels & Resorts is navigating a mixed environment with strategic renovations and cautious optimism for the future. The company's efforts to enhance its properties, coupled with the expected demand recovery, provide a foundation for potential growth in the coming years.

InvestingPro Insights

Xenia Hotels & Resorts, Inc. (NYSE: XHR) has demonstrated resilience in its second-quarter earnings despite facing a mixed market environment. As investors evaluate Xenia's performance and future prospects, it's crucial to consider the financial health and market positioning of the company. Here are some insights based on the latest data from InvestingPro:

InvestingPro Data indicates that Xenia's market capitalization stands at $1.35 billion, reflecting the company's size and investor valuation in the market. The Price/Earnings (P/E) Ratio is currently high at 62.81, suggesting that the stock is trading at a premium compared to earnings. However, this could also indicate investor confidence in future growth. The Gross Profit Margin for the last twelve months as of Q2 2024 is 24.95%, which aligns with the InvestingPro Tip highlighting weak gross profit margins.

InvestingPro Tips provide valuable context for Xenia's stock performance and management strategy. The company has been aggressively buying back shares, which could be a sign of management's belief in the stock's undervaluation or a strategic move to increase shareholder value. On the other hand, the stock's price movements have been quite volatile, which may present both risks and opportunities for investors.

For those interested in a deeper analysis, InvestingPro offers additional tips on Xenia Hotels & Resorts. There are currently 8 InvestingPro Tips available, providing a more comprehensive understanding of the company's financial health and market position. These tips can be accessed at https://www.investing.com/pro/XHR, offering investors the opportunity to make more informed decisions based on expert insights.

In summary, while Xenia Hotels & Resorts navigates the challenges and opportunities within the hospitality industry, investors should consider the company's market valuation, management actions, and stock volatility. InvestingPro Insights and Tips can serve as a guide to understanding the nuances of Xenia's financial landscape and potential investment opportunities.

Full transcript - Xenia Hotels & Resorts Inc (XHR) Q2 2024:

Operator: Hello all, and welcome to Xenia Hotels & Resorts Second Quarter 2024 Earnings Conference Call. My name is Lydia, and I will be your operator today. After the prepared remarks there will be an opportunity to ask questions. I'll now hand you over to Aldo Martinez, Manager of Finance, to begin. Please go ahead.

Aldo Martinez: Thank you, Lydia, and welcome to Xenia Hotels & Resorts second quarter 2024 earnings call and webcast. I'm here with Marcel Verbaas, our Chair and Chief Executive Officer; Barry Bloom, our President and Chief Operating Officer; and Atish Shah, 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 expenditure projects; and Atish will conclude today's remarks with commentary on our balance sheet and outlook. We will then open the call for Q&A. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings which could cause our actual results differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday afternoon along with the comments on this call, are made only as of today, August 2, 2024, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in our second quarter earnings release, which is available on the Investor Relations section of our website. The 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. I will now turn it over to Marcel to get started.

Marcel Verbaas: Thanks, Aldo, and good morning to everyone joining our call today. Our portfolio delivered meaningful RevPAR growth in the second quarter as we continue to benefit from improvement in corporate transient and group demand in many of our markets, offset by some weakness in leisure demand as the quarter progressed. We also continue to make significant progress on the most impactful project in the history of our company, the transformational renovation of Hyatt Regency Scottsdale. This project continues to be on track from a timing perspective. and the excitement is starting to build as we near the completion of most of the major components of the renovation and the relaunch of the property as the luxury Grand Hyatt Scottsdale Resort. Despite a continued strong focus on expense controls by our operators and asset management team, our hotel EBITDA margin in the second quarter was a bit lower than we had projected. This lower margin, combined with RevPAR growth that was slightly below our forecast caused our adjusted EBITDAre to come in approximately $2 million below our internal estimate for the quarter. This was offset by a tax benefit positively impacting adjusted FFO that Atish will highlight in his remarks. For the second quarter of 2024, the company's net income was $15.3 million. Adjusted EBITDAre was $68.4 million, and adjusted FFO per share was $0.52. The renovation disruption at Hyatt Regency Scottsdale continue to be a substantial headwind in year-over-year comparisons. As a resort, delivered particularly strong results in April and May of last year before the start of the renovation project in June. Year-over-year comparisons will become significantly more favorable as the year progresses. Now that we have started lapping the commencement of the renovation. Same-property RevPAR for our 32 hotel portfolio increased by 1.8% for the quarter, while RevPAR increased by 5% when excluding Hyatt Regency Scottsdale. For these 31 hotels, occupancy increased by 389 basis points while ADR decreased by 0.5%. RevPAR growth was driven by strong results at our newly renovated Grand Bohemian Hotel Orlando, Canary Hotel Santa Barbara and Hotel Monaco Salt lake City. Additionally, we continue to achieve encouraging results at a number of our large group-oriented hotels, such as our three Houston hotels, Park Hyatt Aviara, Fairmont Dallas, the Ritz-Carlton Pentagon City and Hyatt Regency Santa Clara. On a same property basis, second quarter same-property hotel EBITDA of $73.4 million was 7.5% below 2023 levels and hotel EBITDA margin decreased 238 basis points. Excluding Hyatt Regency Scottsdale, second quarter hotel EBITDA increased 1.2% and hotel EBITDA margin decreased by 100 basis points. The increase in occupancy, slight decrease in ADR and a mix shift in food and beverage revenues contributed to the margin decline for the quarter in comparison to last year. Our portfolio demand segmentation continues to revert towards pre-pandemic levels. With group and corporate transient demand recovering, and leisure demand softening a bit during the quarter. Same property group room revenues, excluding Hyatt Regency Scottsdale, increased 5% as compared to the second quarter last year. And corporate transient demand continues to strengthen as evidenced by increases in midweek occupancy. Turning to our capital expenditure projects. We now project that we will spend between $125 million and $135 million on property improvements during the year, an increase of $5 million compared to our prior estimate. This is driven by an increase of the Scottsdale project as we have opted to add and accelerate some exterior upgrades. We now expect to spend $70 million to $75 million on Scottsdale renovation in 2024. We still anticipate full completion of the project, including the ballroom and pre-function phase expansion by the end of this year. However, we expect to complete the vast majority of the renovation by the end of the third quarter. We have made tremendous progress on the project over the past several months and continue to do so during the seasonally slower summer months in the Phoenix Scottsdale market. After completing the spectacular new pool complex and excluded beverage amenities earlier in the year, we are now also nearing the completion of the guestroom renovation with almost 90% of the guest rooms having been renovated today. The remaining guestrooms are still expected to be completed by the end of the third quarter, after which our room count will have increased to 496. The renovation of the public space, including the lobby, lobby bar, hotel markets and all indoor and outdoor dining spaces is also progressing as planned, and we also expect to complete these components by the end of the third quarter. We remain particularly excited about our collaboration with Chef Richard Blais on the restaurant concepts and menus as we believe that the upgrade of food and beverage offerings at the resource will be extremely well received by resort guests as well as local residents. Given the expected completion of all the aforementioned components by the end of the third quarter, we expect that the resort will be relaunched as the Grand Hyatt Regency Scottsdale Resort in early October. At that time, the resort will be fully functional and highly attractive for our anticipated higher-rated leisure and group segments. With just the completion of the ballroom expansion and a limited amount of exterior upgrades to follow by the end of the year. Given the revenue displacement we experienced in the second quarter and are now expecting in the third quarter, we have increased our estimate of renovation disruption on our adjusted EBITDAre in 2024 by $1 million. While the renovation will continue to displace a significant amount of revenue and EBITDA during the third quarter, this disruption will largely be eliminated in the fourth quarter as the impact of the ballroom expansion on the overall operations as fee of the resort is expected to be minimum. We are thrilled to be nearing the completion of this significant project and continue to be very excited about the earnings growth potential that we expect we will create through this transformative renovation and not branding. Turning to transaction activity. We previously disclosed that subsequent to the end of the second quarter, we saw the Lorien Hotel & Spa in Alexandria, Virginia for a sale price of $30 million. While this is a relatively small transaction, we were pleased with the execution of the sale with the price representing a 21.3 times multiple on hotel EBITDA for the 12 months ended May 31, 2024. We believe that the successful sale of this hotel at this attractive pricing and the ability to use the proceeds in a more accretive manner with a prudent capital allocation decision for the company is reflective of the value embedded in our portfolio. We will continue to exercise patience as we evaluate any further potential dispositions and possible acquisitions to drive shareholder value in the years ahead. Meanwhile, we remain pleased with the overall quality and diversification of the portfolio and our internal growth potential. While we don't expect meaningful shifts in the composition of our portfolio in the near term, we will continue to look for opportunities to enhance our portfolio's quality and earnings growth potential if market conditions are conducive as we have done throughout the history of our company. We intend to continue to manage our balance sheet prudently as we evaluate these potential growth opportunities. Looking ahead to the second-half of the year, we are taking a slightly more cautious stance compared to our expectations last quarter. We estimate that current same-property RevPAR increased approximately 2.6% in July as compared to the same period in 2023. When excluding Hyatt Regency Scottsdale, we estimate that July RevPAR is up approximately 1.9% compared to last year. Despite these positive top line results in July, we have slightly reduced our estimates for adjusted EBITDA for 2024 as compared to last quarter. This is reflective of both our recent operating results and greater uncertainty regarding our portfolio and market performance in the second-half of the year. Atish will provide additional detail on our updated guidance during his remarks. Despite short-term uncertainty, we remain optimistic regarding our portfolio performance and earnings growth potential as we look ahead to 2025 and beyond. We continue to expect that embedded growth in the portfolio will be a significant driver for future outperformance, particularly as the Grand Hyatt Scottsdale Resort ramps up. And importantly, supply growth is anticipated to remain muted in the luxury and upper upscale segments in our markets over the next several years. I will now turn the call over to Barry to provide more details on our operating results and capital projects.

Barry Bloom: Thank you, Marcel, and good morning, everyone. For the second quarter, our 32 same-property portfolio RevPAR was $185.69 based on occupancy of 71% at an average daily rate of $261.5 an increase of 1.8% as compared to the second quarter in 2023. Excluding Hyatt Regency Scottsdale, second quarter RevPAR was $191.28, an increase of 5% as compared to 2023. This increase reflected 3.9 points of occupancy gain and a decline of approximately 0.5% in average daily rate as compared to the second quarter of 2023. As Marcel indicated in his remarks, the same property leaders in terms of RevPAR growth in the quarter including our hotels that underwent comprehensive renovations in 2023, Canary Santa Barbara, Grand Bohemian Orlando and Monaco Salt Lake City. Collectively, RevPAR of these hotels was up 42.3% in the second quarter. Additionally, RevPAR grew significantly at our two hotels in Dallas, collectively up 19.4%, Ritz-Carlton Pentagon City up 14.3%; Park Hyatt Aviara up 11.1% and Waldorf Astoria Atlanta Buckhead up 10%; Westin Oaks and Galleria up 9.6%; and Hyatt Regency Santa Clara, up 8%. The growth in these markets is a result of clearly improving business transient and group demand that we're seeing across the portfolio. Markets that experienced RevPAR weakness compared to the second quarter of 2023 as a result of softer group business, including New Orleans, Orlando and Nashville, while Savannah and Key West experienced softer leisure demand. Despite softening in the Nashville market as a result of new luxury supply absorption, our W Nashville continues to perform well relative to this new supply despite announcements of several of those properties. We do not expect them to be online for many years. Future group bookings are strengthening as evidenced by record group booking production month in June. And in the second quarter, business transient production was up nearly 90% in room nights, compared to the second quarter last year. In Portland, our Hyatt Regency at the convention center continues to perform at a share level significantly above the remainder of the market due to its unique location and has continued to average occupancies in the upper 60% range. Looking at each month of the quarter and excluding Hyatt Regency Scottsdale, April RevPAR was $200.77, up 6.1% to April 2023. May RevPAR was $193.81, up 7.7% compared to May 2023, and June RevPAR was up $179.16, up 1% compared to June 2023. We continue to be optimistic about the recovery in corporate and group rates as we continue to achieve higher mid-week occupancies across the portfolio, particularly on Tuesday and Wednesday nights, where portfolio occupancies of approximately 80% continue to provide meaningful rate compression opportunities. We note that compared to 2019, which excludes Hyatt Regency Scottsdale, Hyatt Regency Portland and W Nashville. During the second quarter, daily occupancy still trailed by approximately 9 occupancy points midweek while Friday and Saturday occupancies trailed 2019 by approximately 3 occupancy points. While this gap is somewhat disappointing, our continually improving performance in our corporate transient and corporate group driven hotels gives us confidence that we still have significant growth ahead as our hotels continue to close this gap. Business from the largest corporate accounts across our portfolio continues to be significantly behind 2019, while corporate business from small and medium-sized accounts has recovered much more significantly. Again, recent performance in our corporate transient-driven hotels gives us confidence that we still have significant growth ahead. Group business continues to be a bright spot across the portfolio, where we continue to see a reversion of pre-pandemic patterns. For the second quarter, excluding Hyatt Regency Scottsdale, group room revenues were up just over 5% as compared to the second quarter of last year. This growth was split relatively evenly with room nights up 2.9%, an average rate of 2.4%. We see a continued trend in our mix of group business with association group business now recovering at a stronger pace than corporate group business and more bookings for future years than the current year. Now turning to expenses and profit. Second quarter same-property hotel EBITDA was $73.4 million, a decrease of 7.5% on a total revenue increase of 0.7% compared to the second quarter of 2023, resulting in 230 basis points of margin decline. Excluding Hyatt Regency Scottsdale, hotel EBITDA was $74.1 million, an increase of 1.2% on a total revenue increase of 4.6%, resulting in a margin decline of 100 basis points. This decline in hotel EBITDA margin for the quarter was a result of several factors. Excluding Hyatt Regency Scottsdale, homes department costs increased nearly 8% over last year, primarily as a result of continued occupancy growth, However, this equated to just a 2.1% increase on a per occupied room basis. Food and beverage revenue growth slowed to just 2% during the quarter as association business grew significantly more than corporate business impacting banquet revenues as food revenue grew while beverage revenue declined, putting pressure on overall F&B margins. Cancellation & Nutrition revenues declined 35% compared to last year, returning to normalized levels, also impacting margins. However, other operating department income, including parking, spa and golf revenues was up 21%. In the undistributed departments, expenses in each of A&G, property operations and utilities we're generally well controlled with approximately 4.5% growth each, while sales and marketing expenditures were up over 10% compared to last year as hotels continue to grow their sales teams and see continued growth in expenditures on digital marketing efforts and loyalty programs. Turning to CapEx. During the second quarter, we invested $35.8 million in portfolio improvements, bringing our year-to-date total to $69.3 million. As Marcel discussed, we continued our significant work on the transformative renovation and up-branding the higher Regency Scottsdale Resort and Spa at Gainey Ranch, and are pleased that the project continues to be both on time and on budget. Our increases to budgeted capital expenditures are related to work on the building exterior and facade, which includes both an expansion of scope and acceleration of timing in order to accomplish that work this year. We continue to be incredibly optimistic about the hotel will perform post renovation. The initial response from both leisure and group guests has only affirmed our confidence in our expected outcome from the substantial investment. We are seeing future group business being booked at meaningfully higher rates than the hotels achieved historically with the average daily rate for group bookings for 2025 up over 20% from 2022. In addition, year-to-date group room night booking production for future dates is at its highest level since 2018. Much of this is the direct result of the expansion of the larger Arizona ballroom which will allow the hotel to retain existing group customers as well as attract new group customers who otherwise could not be accommodated at the resort and the spectacular guest experience is being created throughout the resort. Initial response and feedback from the luxury traveling community, a key component of the hotel's refined business plan has also been very strong as this channel views the property as a completely new addition of the Scottsdale market that they are excited to introduce to their clients. Planned renovations are currently underway at two of our Texas hotels during the seasonally slow summer months, including renovation of the lobby and restaurant, relocation of the fitness facility, addition of a concierge lounge and upgrading the Heavenly Beds of the Westin Oaks Houston and renovation of the lobby and upgrading the Heavenly bands at the Westin Galleria Houston. Comprehensive renovations of the lobby and restaurant and creation of M Club at Marriott (NASDAQ:MAR) Woodlands Waterway will take place in the late summer and during the fall. In addition, we're making select upgrades to the guestrooms at several of our largest assets, including Hyatt Regency Scottsdale Santa Clara, Marriott SFO and Renaissance Waverly in Atlanta. We expect minimal disruption from these projects. We are also continuing with approximately $20 million of infrastructure and sustainability projects this year, including significant HVAC upgrades at Andaz San Diego, Vermont, Dallas, Marriott SFO, Hyatt Regency Santa Clara, Renaissance Waverly and the Ritz-Carlton, Denver. We are excited about the work our in-house project management team has underway and will contribute to future growth throughout the portfolio. With that, I will turn the call over to Atish.

Atish Shah: Okay. Thanks, Barry. I will provide an update on 2 items. Our balance sheet and our 2024 guidance. As to our balance sheet, it continues to be a point of strength for the company, we maintain a significant unencumbered asset base and ample liquidity Our next debt maturity is over a year from now, and we expect to address it well in advance. Our current leverage ratio pro forma for the Larian disposition is approximately 5.2 times trailing 12-month net debt to EBITDA. As a reminder, our long-term target is a leverage ratio in the low 3 times to low 4 times range. We expect to move closer to that range in 2025 as Grand Hyatt Scottsdale resort ramps up post renovation. Turning next to our 2024 full-year guidance. Beginning with RevPAR, we have lowered our expectation for RevPAR growth by 50 basis points to 3% at the midpoint. Excluding Scottsdale, we are lowering our expectations for RevPAR growth by 25 basis points to 3.75% at the midpoint. Our lower RevPAR expectation is a combination of slightly lower-than-expected second quarter RevPAR as well as more muted expectations across the portfolio, including in Scottsdale. As to adjusted EBITDAre, we have lowered the midpoint by $5 million to $249 million. This reduction is driven by 3 items as follows: $1 million due to the sale of the Lorien Hotel in July, $1 million due to higher renovation-related displacement in Scottsdale, and $4 million due to lower RevPAR and its corresponding impact on margins. Half of this or about $2 million was in the second quarter, and the other half relates to our second-half forecast. These 3 items are offset by $1 million in lower G&A expense. As to the weighting of adjusted EBITDA by quarter, we expect the third quarter to be just under 20% of the year's adjusted EBITDARE and the fourth quarter to be in the mid to high 20% range of full year adjusted EBITDAre. As to our adjusted FFO per diluted share guidance, we are reducing it by $0.005. We now expect FFO per share of $1.68. This is due to the change in adjusted EBITDAre being mostly offset by favorability and expected in tax expense. For the year, we have an income tax benefit of $3 million versus prior guidance of a $2 million expense. The $5 million positive variance is due to the release of a valuation allowance on certain state level income tax deferred assets. Our full-year capital expenditure guidance has increased by $5 million, and our interest expense guidance is unchanged. Apart from the formal guidance, we want to also provide some color on our outlook for the remainder of the year by demand segment. Business transient continues to drive this part of the recovery, our negotiated corporate business is still very much in recovery mode, particularly in urban markets, and this is translating to recent increases in our second-half forecast for our hotels in Burlingame and Santa Clara, California, Houston and Dallas, Texas and Philadelphia, each of which historically has done healthy levels of business transient. Next, the group segment continues to be strong while group revenue pace is up only about 1% for the second-half, excluding Scottsdale. This is primarily due to a tough comparison over a couple of months, which were quite strong last year. Second-half group rates are up over 2% and our hotels continue to have strong near-term booking activity. For instance, in the second quarter, group revenue production for the third quarter was 5% higher than last year. As we look further ahead, group for 2025 is starting to shape up well. As is typical this far in advance, about one-third of our expected 2025 group revenues is currently on the books. Pace, excluding Scottsdale is up in the mid-teens percentage range and on pace, including Scottsdale is even higher. Last, leisure demand continues to normalize, but there are properties and markets that are starting to maintain their business levels such as Charleston, South Carolina and Mount Brook, Alabama. And other markets, which are ramping post-renovation such as Santa Barbara. Leisure is not as large a part of our demand mix once we get past the summer and leisure comparisons at our smaller hotels in key leisure markets. get much easier starting in the fall. As to the expense picture, we continue to experience moderation in expense pressure relative to last year. Our second quarter margin was impacted by lower-than-expected ADR. The second quarter margin decline is the greatest quarterly decline we expect this year. We expect margins to be positive in the second-half driven by Scottsdale. And even excluding Scottsdale, we expect more modest margin decline of less than 25 basis points. Before I wrap up, I'll add that we continue to be well positioned for opportunities to evolve the portfolio in the years ahead. And despite the slightly softer top line outlook for this year, our current guidance for adjusted FFO per share reflects 9% growth over 2023. We expect our rate of earnings growth to further increase as we look ahead to favorable dynamics including more limited new hotel supply, moderating expense growth and further strengthening in business transient business and transient improved hotel demand, which drive the bulk of the company's profits. As we look ahead, we remain confident in the longer-term earnings power of the company. And with that, we'll turn the call back over to Lydia to begin our Q&A session.

Operator: [Operator Instructions] Our first question today comes from Michael Bellisario with Baird. Please go ahead. Your line is open.

Michael Bellisario: Good morning, everyone.

Marcel Verbaas: Good morning.

Michael Bellisario: Barry, first question for you. booking channels. What are you seeing with loyalty redemptions I guess, what does any change there, maybe historically tell you about demand and demand patterns? And is there any change in the loyalty bookings? Is that affecting RevPAR and margins at your hotels and across the portfolio?

Barry Bloom: Yes. Good question. So we have relatively few hotels that are significant redemption hotels. In those hotels, we are seeing lower redemptions this year than we had seen in prior year. But one of the reasons we've continued to drive documents in those hotels is because we want to make sure we're getting redeemed at the premium redemption rates. We don't -- we've not gotten a lot of insight from the properties as to really why redemptions are down. There's some conversation about people having used up and spent a lot of their points historically and in our hotels that had been high redeemers, continue to be high redeemers within their various brand families.

Michael Bellisario: Got it. Understood. And then just second question, just on the -- I think I heard you correctly, the better business transient outlook for the second-half of the year in a handful of those markets like SFO in Houston and a few others. Can we kind of dig in there a little bit, what customers, what types of industries are you seeing the pickup there? And how much of it is rate versus occupancy driven?

Barry Bloom: Yes. We certainly continue to see continued growth in small and medium-sized businesses. But in some of these larger markets, whether that's -- and I think it's part of what we saw in Q2, and we look forward to seeing continue through the year is in some of these more major markets, whether that's Houston or Dallas, San Francisco. We're seeing more Santa Clara as well, we're seeing more significant increase than we have historically in the larger corporate accounts. So thinking more Fortune 100 accounts and the consulting and accounting firms are showing greater growth than they have thus far in the recovery from the pandemic.

Michael Bellisario: I mean is that pickup that's primarily demand then, not just rate?

Barry Bloom: The pickup is primarily in demand. But again, where that business is coming in on Tuesday and Wednesday nights in particular, hotels were able to compress their corporate rate or nonlarge corporate account business. So as you know, last year, the increases that we got as an industry across the largest negotiated corporate accounts were not terribly significant. But we do rely and are looking forward to and part of what we've seen is that as we are able to fill with more large volume account business that lets the hotel compress and drive rate from the non-negotiated accounts.

Michael Bellisario: Thank you. That's all for me.

Operator: Our next question comes from David Katz with Jefferies. Please go ahead.

David Katz: Hi, morning everyone. Thanks for taking my questions. I wanted to just talk about leisure and the portfolio and some of the commentary, it does seem as though leisure at least for the moment, right, is slowing. And obviously, that may not bode well for an ideal opening in Scottsdale. But does it inform any sort of other strategies that you can pursue or any other sort of deals that you can make, obviously, I'm thinking more disposition wise? Or anything you can do sort of in that context sort of deal with or approach leisure slowing a bit?

Marcel Verbaas: Yes. Thanks for the questions, David. As you know, our portfolio is very balanced and being able to really play with all demand segments. And we've obviously spoken on this call already quite a bit in our prepared remarks about where we're seeing strength coming on the corporate transient and group side that is really offsetting some of the weakness that we are seeing to a certain extent on the leisure side. Now when you look at our leisure markets, and I think Atish pointed out in his remarks, we do have a few markets that are holding up fairly well on the leisure side, and we have some markets where you are absolutely seeing some softening. But even in some of the markets where you're seeing kind of a more kind of a greater softening. For example, Orlando is absolutely a softer leisure market this year than it was last year. And some of that probably has to do with Universal opening up a new part next year, which generally kind of drives more demand into that year and a little bit of a slowing going into that. That's not really what's impacting us in a market like Orlando, for example. And we have our Grand Bohemian Orlando downtown that is really corporate transient-driven hotel that is doing very well coming off of its renovation. And some of the softness that we saw in Grand Cypress was more just about some group business that was down there as compared to really suffering from the leisure demand that's pulling back. you translate that to your kind of the second part of your question as it relates to first Costo and kind of the rest of the portfolio. Scottsdale, as you know, a very big component of what we're doing there is the expansion of the meeting space. And historically, it has been a very much a group-oriented hotel where this additional ballroom space will do all the things that Barry highlighted in his remarks as far as being able to take bigger groups as opposed to having more flexibility and what type of groups we're taking. So the group strategy is a very big component of that. And the other side of it is Scottsdale is not a trendy leisure market. It's a very consistent high-end leisure market that does extremely well, particularly in the seasons, where there is a lot of compression there. So it doesn't give us any real concerns as we're as we're completing that renovation and that's where we're getting into next year. So we still feel very good about that. And really, like I said, have -- don't have a lot of concerns about there's any overall slowing in leisure impacting that in a significant way. And for the rest of the portfolio, as I pointed out in my remarks, over time, we will always look at how do we continue to operate the quality of the portfolio, the earnings growth potential but we feel really good about the balance that we have in our portfolio. And we have -- we didn't shift to just a leisure only strategy. We're still very focused on the bulk of our business, which is really corporate transient and group and leisure as the third component.

David Katz: Understood. And I'm not sure that I fully understand the sort of outbound international versus inbound international travel. I guess I had thought that this was going to be a little better summer for that than perhaps what it's turned out to be. Is there anything more to it than just the sort of cost decision or the value of the dollar as you see it?

Marcel Verbaas: Yes. We obviously see the same things you do as it relates to kind of overall market data. And certainly, the international outbound travel has been very strong still, it appears. And I think overall, everyone was expecting maybe that will be a little bit weaker this year and see that balance shift in a different direction a little bit. Our portfolio isn't driven very heavily by inbound international traffic. We have very few assets where that's a meaningful component of our portfolio. So even though we see kind of the overall trends in the market, we're probably not the best position to take a very strong position on that.

David Katz: Understood. Thanks for taking my questions.

Operator: Our next question today comes from Aryeh Klein with BMO (TSX:BMO) Capital Markets. Please go ahead. Your line is open.

Aryeh Klein: Thanks and good morning. Maybe just following up on the leader comment. Just from an out-of-room perspective, what are you seeing on that front? And even beyond leisure, is that -- are you seeing any kind of impact elsewhere, whether it's group or BT or anywhere else? Thank you.

Barry Bloom: Yes. I think in particular, on leisure, we've been I wouldn't say surprised but encouraged that outlets are still busy generally across the portfolio and that the consumers seem to comparing to certainly pre-COVID, they seem to be -- they seem to eat and drink in the hotel more frequently meaning our in-house capture in general across the portfolio is better than it was pre-COVID. Some of that obviously is because of pricing and the price increases we've taken in restaurant in bar in bar pricing. But we feel pretty good about that out of the out-of-room spend. And what we're seeing in ancillary areas like parking and spa and even retail in some of the properties we have that has held up pretty well, in fact, very well. I mentioned that at some of those departments are the other operating departments combined were up over 20% in Q2 versus prior year. So we feel pretty good about that out of room spend.

Marcel Verbaas: I think that Barry just highlighted in his comments as well. A little bit of a shift in the mix of the group business with associations just take being a bit stronger than corporate group at this point, which does impact the additional spend by -- to some extent.

Barry Bloom: Certainly, the bank would spend in food and beverage, for sure.

Aryeh Klein: Thanks for that. And then just on the expense side of things. I guess what has changed there from your perspective versus your prior expectations? Because it does seem like some peers are seeing softening on the expense pressure side of things. I guess what's embedded from a same-store expense growth for this year? And do you think that moderates as we look ahead to next year?

Barry Bloom: We do think it moderates and Atish mentioned that we do expect it to moderate for the remainder of the year. I think we -- a big picture, and I went through some of the detail in the remarks, but I think big picture, that we're like -- we're driving occupancy very well, which means we're servicing more guests. And I think I feel much better when we look at the per occupied room expense growth. as opposed to the raw expense growth. And I think that's obviously kind of proof to us in part that a lot of this is occupancy driven. I think there's also. And I mentioned it, that part of our strategy and part of the hotel strategy of driving occupancy is at a higher cost, particularly in sales and marketing, where we're utilizing where we have more salespeople on board across the portfolio. We have -- we're doing more paid search and more digital marketing, and we're doing more paid search in part in certain markets to OTA channels, which is an expensive channel. But in those properties that are doing that. The goal is to make sure that we're filling the hotel and driving enough business into the hotel to support the overall operation and grow bottom line dollars even if it's an expense of margin.

Aryeh Klein: Thank you.

Operator: Our next question is from Jack Armstrong with Wells Fargo (NYSE:WFC). Please go ahead.

Jack Armstrong: Hey, good morning, everyone. So Nashville had a kind of a tough quarter from a leisure perspective. Did the -- we continue to gain market share in that environment? And are there any updates on the new restaurant concept there or any other out-of-route drivers?

Barry Bloom: Yes. No update on the restaurant concept. We're working on some -- we think there will be some pretty exciting ideas that hopefully, we'll be able to share in the near future. Our for Nashville, we actually held up fairly well relative to the comp set in terms of leisure in Q2. We did very well, as I mentioned, in the corporate transient, but we had a challenging time on the in-house group side. It's really the front view, we've experienced that. We had some turnover in the sales department in the month leading into the second quarter and just -- and we're not able to really recover from that. Having said that, and I mentioned earlier, that production in June and what we're first hearing about July for future dates is that we're back on track in terms of driving group business into the hotel. And the way that we've talked before, I think, is much more meaningful than we had originally anticipated in our underwriting.

Jack Armstrong: Okay. That's helpful color. And then just kind of based on your take on the macro environment and the slowdown you're seeing in leisure, are you assuming the stabilization of coal might be pushed out a bit? Or do you think the group booking pace that you're seeing for '25 to keep it on track with the original underwriting?

Marcel Verbaas: Really not seeing anything at this point that would cause us, like I said earlier, to change our view of where this will stabilize and how this will stabilize. So leisure is obviously an important component, but group is really the most important component as we kind of build up the occupancy there. And then, again, because of the seasonality in the markets, really make sure that we take advantage of how frothy those first essentially five months of the year are to really drive the increased rates and everything that we're looking to do as a result of the renovation. So any kind of overall global softening of leisure demand. I mean, certainly, the stronger leisure and the better. But at this point, we're not -- we're not seeing anything that gives us any pause on how we think this is actually the same bus.

Jack Armstrong: Okay, great. That's it for me. Thanks.

Operator: [Operator Instructions] Our next question comes from Tyler Batory with Oppenheimer. Please go ahead.

Tyler Batory: Hey, good morning. Thanks for taking my questions. I wanted to ask about the group business. I think you said you're pacing up 1% for the second-half. What are you seeing in terms of -- in the quarter for the quarter bookings? And then can you talk a little bit about the citywide calendar in the second-half of this year as well?

Atish Shah: Yes. Why don't I start on that? Maybe, Barry, you can talk about the citywide calendar. So in terms of production, I think I referred to production being strong in the second quarter and being up 5% for the third quarter relative to last year. So we continue to see healthy levels of near-term business? And similarly, for sort of in the quarter, for the quarter, activity continues to be good. So while our pace numbers 1% excluding Scottsdale is not that strong for the back half of the year. Again, we're seeing good levels of activity. So we have confidence in that and the rate profile continues to be good, up over a couple of percent. So that's really informing our guidance. And then, Barry, if you want to add anything citywide calendar?

Barry Bloom: Yes. On city-wide, we've talked about this before that our portfolio in general is not heavily reliant on city-wide’s as it relates to the portfolio overall. Some of the properties where we do enjoy traditionally big city-wide business would be Portland, obviously, where we're next in convention center and the setup there is we've long known is a little bit soft in the second-half of this year, but the hotel has worked hard to try to offset that with in-house business. And that's certainly one of the pluses of understanding citywide business and knowing kind of where those gaps are. So we've done a good job of doing that. Dallas, we participate in some city-wide’s there were Q3 and Q4 are both down a little bit from prior years. But again, they were also quite a bit down in Q1 as well, and we were able to perform very well through that in Dallas. And then the other markets are relatively little importance as it relates to how much compression we get from citywide business and/or whether we tend to not fill when city-wide’s aren't in, but other markets where we do participate in city-wide’s are or Nashville, which has a good setup for Q3 and Q4 as well.

Tyler Batory: Okay. Quick follow-up on the leisure discussion here. In terms of your channel mix, have you increased using OTAs or other discount channels more to drive business? I'm not sure if that's something that's impacting the cost structure, too.

Barry Bloom: In some hotels, where they really believe that driving occupancy is going to be -- is the best overall strategy because it's going to drive the most ancillary spend, keep the building busy. We have hotels that are definitely using more OTA marketing than they have historically, and it is a lower revenue, higher cost channel. So that certainly is one of the factors that has had some impact on margin.

Tyler Batory: Okay. And then just the last question for me. I'm trying to think about what 2025 might look like from an EBITDA perspective. I know you can't give guidance. I guess one thing at a time, I got to get through 2024 first. But with your portfolio, I think there's a lot of moving pieces to some of the acquisitions with some of the renovations, some disruption. So if you could kind of run through some of the potential building blocks on the EBITDA side of things, just to try to help us frame a starting point, if you will, for next year.

Marcel Verbaas: Well, I think one thing to refer to is the slide in our prior investment -- investor deck bridges to the future. And obviously, it doesn't go by year, but you have some major components, one being Scottsdale, where we expect $20 million of EBITDA lift between now a stabilization plus disruption. So getting that back, that's a big piece. Obviously, the newer assets, W Nashville and Portland are big drivers. And then finally, outsized growth and some assets in the portfolio, particularly those in Northern California, which are still have a lot of recovery potential and have certainly shown strong signs of recovery this year. So those building blocks are there. And I think as we get closer into next year and certainly in the beginning of the year, we can highlight those with more specificity as to how each one of those are shaping up for next year. It's just a little bit too early given that our hotels are just now starting the budgeting process. So getting into a lot of detail on that at this point is just really tough for us to do.

Marcel Verbaas: So obviously, a long way to get to '25. We -- and Atish did highlight some of the positives as we go into next year. And it's a little earlier than we normally like to speak about kind of where group base is shaking out, but we're seeing some very encouraging signs there. And the one piece that we can move out ahead. And then Atish pointed there about at this time of the year, like every year, there's probably about -- only about one-third of your group business for next year on the books. But our pace is very healthy thus far. And especially some -- when you think about some of the things Atish talked about with the booking base and what we've seen over the last couple of months, we're very encouraged about what the hotels are able to put on the books for next year. And that's even outside of what we expect to get from Scottsdale, which is showing some very encouraging signs, particularly on the rate side. So we are -- we've talked a number of times about that we look at the setup for '25 and beyond being very positive for us, and we continue to feel that way.

Tyler Batory: Okay, very helpful. Thank you

Operator: Thank you. We have no further questions. So I'd now like to turn the call back to Marcel Barbas for any closing comments.

Marcel Verbaas: All right. Thanks, Eli, and thanks, everyone, for joining us this morning. I know it's been a busy week of earnings calls in our space. So we thank you for joining us, and hope you enjoy whatever is remaining of the summer, and we'll speak with you over the next few months. Thanks again, and we'll look forward to updating you in the future.

Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.

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