Sunstone Hotel Investors, Inc.

investors' second quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, August 6, 2025, at 11 a.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that the commentary on this call will contain non-GAAP financial information, including adjusted EBIT.RE, adjusted FFO, and hotel adjusted EBIT.RE. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our quarterly results have been provided in our earnings release and supplemental which are available in the investor relations section of our website. With us on the call today are Brian Giulia, Chief Executive Officer, and Robert Springer, President and Chief Investment Officer. Brian will start us off by providing some commentary on second quarter operations and recent trends. Afterward, Robert will discuss our capital investment activity. And finally, I will review our second quarter earnings results and provide the details of our updated outlook for 2025. After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Brian. Please go ahead.

Thank you, Aaron, and good morning, everyone. The second quarter got off to a noisy start with a tariff announcement in early April coming on the heels of the slowdown in government demand in response to the cost cutting initiatives enacted earlier in the year. While these cross currents led to heightened uncertainty and negatively impacted all demand segments to some degree, we saw pockets of strength across our portfolio that offset these broader headwinds and generated second quarter total portfolio results that were in line to slightly ahead of expectations albeit with broad variation by market. I'll start by sharing some additional details on our second quarter operations and accretive capital recycling. I'll then discuss the key assumptions underlying our updated outlook for the year, which includes some additional headwinds from a softer leisure demand environment, lower government volumes, and a moderated pace of ramp up at Ondas Miami Beach over the next few months. While we are seeing recent signs that give us reasons to be optimistic, we are taking a more cautious approach with fourth quarter expectations given the heightened uncertainty and limited visibility. That said, there are several encouraging signs, especially with recent leisure bookings in Miami and Waialea, that if they persist, could lead to a better than anticipated fourth quarter. So starting with our quarterly results, our urban hotels led the portfolio, growing RevPar by more than 9% driven by healthy corporate group and business travel demand. Marriott Long Beach downtown turned in another solid quarter with RevPar increasing nearly 70% as the property continues to benefit from our recent investment and brand conversion last year. In addition, the Bidwell Marriott Portland saw 10% growth in rev par as the hotel is more aggressively competing for business and the market continues to recover. Following a very strong first quarter, JW Marriott New Orleans turned in a sequentially softer but better than expected second quarter. We knew coming into the year that the New Orleans market would have a strong first quarter aided by the Super Bowl and an active citywide calendar, but that the remaining quarters of the year would experience very tough comps. And so while the second quarter rev par at our hotel declined from last year, the performance was better than expected and allowed the hotel to gain market share. At our convention hotels, Corporate demand remained healthy, but we saw more mixed performance of citywide events across our markets. San Francisco once again surprised to the upside with rev par growth of 6.5% and total rev par growth of over 16% driven by a better citywide calendar and increased levels of commercial activity in the downtown area. This is the second consecutive quarter where performance has exceeded our expectations and the hotel has ample opportunity to further grow earnings as group pays for the second half of the year and into 2026 is very strong. In Washington DC, our performance was hampered by additional government and government related cancellations and from several citywide events, that underperformed across the market. The third quarter is expected to be more challenging than initially anticipated as the market and our hotel continue to feel the impact of weaker contribution from government business and from affiliated events that rely on government funding. In San Antonio, we faced a difficult comparison to last year when we had very strong contribution from in-house group business that did not repeat this year. As we move into the third and fourth quarters, we will be completing a renovation of the meeting space, which will cause some short-term disruption, but which will better align it with the quality level of the already renovated guest rooms. This hotel has an ideal location within the market. and the combination of the updated meeting space, the completion of the Alamo Visitor Center next door, and our ability to reprogram the Riverwalk level to drive additional tenant revenue, all combined to create a compelling opportunity to grow earnings at this hotel in the coming years. In San Diego, occupancy was in line with expectations but we saw softer conversion of group ancillary spend and some transient rate sensitivity, which contributed to lower top line performance. Alternatively, the Renaissance Orlando at SeaWorld had a strong quarter with good group contribution and solid production. In fact, year-to-date production is up 16% in room nights and over 30% in revenue, as the hotel sales team has been deploying multiple new strategies to book future business. Out of room spend was particularly strong during the quarter, with most hotels in the portfolio generating ancillary spend above expectations, resulting in total revenue growth coming in 150 basis points higher than room revenue growth in the quarter. Within our resort portfolio, we saw increased price sensitivity at our oceanfront resorts in Waialea and Key West that contributed to lower than expected growth. As we shared with you last quarter, we anticipated that Waialea Beach Resort would have a choppier Q2 and Q3 as all inventory comes back online on the west side and the island further recovers following the fires. This continues to be our expectation and we remain of the view that this period of transition as the Kaanapali Submarket reopens is a needed step and will be a long-term positive for the island as it will ultimately bring the return of more guests and drive additional airlift into Maui. Kaanapali is absolutely normalizing and its occupancy is approaching stabilized levels which will benefit the Waialea Beach Resort. Our updated outlook assumes we face some incremental headwinds in the third quarter, with some moderation in the fourth quarter relative to our prior estimates. There are several positives that support an accelerating growth story in the fourth quarter and into 2026. First, the state has allocated marketing funds that will support current and future business. Second, airline capacity is improving, increasing total visitors to the island by 11% compared to 2024. These factors are driving recent increases in weekly transient bookings, which, if it continues, should position us better for Q4 and 2026 at one of the largest EBITDA producing properties in our portfolio. In wine country, We were pleased with the performance of Montage-Hedelsberg and Four Seasons Napa Valley, both of which grew revenues and earnings more than expected. Luxury group and transient travel remained strong at our high-end resorts. At Four Seasons, the resort grew occupancy by over 500 basis points and rev par by 3.5%. Despite comping over a strong quarter last year, which benefited from strong buyout activity. Over in Sonoma County, we had a solid quarter with Montage growing occupancy by over 1,200 basis points with a corresponding 18% increase in REVPAR and a 23% increase in total REVPAR. While results at Montage benefited from a favorable tax appeal outcome, even without this impact, the resort grew earnings and margin ahead of our expectations. Year to date, our two wine country resorts increased occupancy by over 700 basis points and grown total rev par by over 9%, driven by a combination of more resilient luxury demand and our efforts to better optimize the business mix. As we shared with you on our last call, we opened the Ondas Miami Beach on May 3rd of this year. We had previously planned to open the resort in March, allowing us to take advantage of the high demand spring break period, which would have supported strong occupancy from the outset. Missing spring break and opening in the beginning of the low summer season resulted in an EBITDA swing of several million dollars in the second and third quarters, as it will take longer to build occupancy, move up in the online ratings, And most importantly, advance our placement on third party booking channels. Which is driven by the number of bookings and reviews. While the later opening has also caused us to trim our expectations for the early part of the 4th quarter. The resort is now generating transient bookings near the levels needed to achieve our desired occupancy at year end. which positions the property to be able to deliver on our expectations for 2026. The reviews of the resort have been overwhelmingly positive with TripAdvisor ranking increasing from number 200 out of 212 hotels in Miami Beach to 26 in just three months. Group business is growing quickly with over 1,800 definite room nights on the books for 2026 at a $600 rate and over 2,000 tentative bookings at over $600. 2026 will be a good year in the market with a college football national championship game, F1, and the FIFA World Cup. Robert will share some of the additional steps we are taking to increase the ramp up pace in the interim. While our updated guidance range assumes we will have a noisier next few months leading up to the festive period at year end, we remain confident in our investment thesis and our full focus is on delivering the meaningful multi-year earnings growth that this renovated oceanfront resort can produce. On the capital recycling front, during the quarter we sold the Hilton New Orleans St. Charles at a mid-8% cap rate on last year's earnings, or a mid-6% cap rate, including near-term CapEx, and fully redeployed those proceeds along with additional capital into $100 million of share repurchases this year. The hotel was going to require additional capital investment to maintain its current level of earnings, and we anticipated that the resulting yield would be inferior to what we could achieve by reinvesting in our own stock at a compelling discount. So we sold the hotel at an attractive price and did just that. This was a good trade and it brings the total amount of share repurchases since the start of 2022 to nearly 300 million or nearly 14% of shares outstanding. We recognize that current trading levels would allow for additional accretive share repurchases, and we expect to be thoughtful as we evaluate additional repurchase activity, balancing leverage, diversification, optionality, and the evolving return profiles of other potential allocation opportunities. While we saw pockets of strength in the portfolio during the second quarter and earnings came in generally in line with our prior expectations, we are moderating our outlook for the remainder of the year. This is driven primarily by continued weakness in government and government related demand in Washington DC. Further softness in YLA in the third quarter and a more gradual near term ramp up at Ondas Miami Beach. Waialea and DC are two of our largest hotels, and given the concentrated nature of our portfolio, the short-term impact weighs on the company. Looking forward, we believe we have reached the occupancy inflection point in Waialea, and we are seeing transient booking volumes supporting improvement going into the fourth quarter. DC has strong group pace next year that should help lift performance compared to 2025. Miami was slow to get out of the gate, but recent booking velocity, guest reception, and group bookings point to this remarkable resort having a strong 2026. That said, sustained heightened macroeconomic uncertainty, volatility related to recent policy changes, and increasingly limited forward visibility have caused many of our operators to take a more conservative view for the second half of the year. While we have reasons to be optimistic that we can work with our hotel teams to drive earnings above the revised projections, we believe it is prudent to recalibrate our outlook based on what we see today. And with that, I'll turn the call over to Robert to give some additional details on our focus areas in Miami and near-term capital investments. Robert, please go ahead.

Thanks, Brian. While we are very pleased to have Ondas Miami Beach open and think the renovated resort looks fantastic, we continue to work on multiple fronts to make up for the late opening. Following the resort's debut in early May, there were a few operational items that needed to be addressed which limited the inventory of available rooms, prolonging our opening timeline and slowing the ramp in the initial months. Now that we have addressed these issues, we have a fully functional resort that is gaining momentum into Q4 2025 and Q1 2026, the two most important quarters of the year for the market. Guest response has been phenomenal with the resort's TripAdvisor rating increasing meaningfully in the first 90 days. The positive reviews are contributing to a significant increase in transient bookings. To achieve our desired occupancy goals, we need to book approximately 1,000 transient room nights per week. between May and July, we were averaging around 200 to 300 transient bookings per week. This makes sense given some of the final work that was going on during the initial weeks after opening. Over the past several weeks, we have been averaging eight to 900 weekly bookings, clearly moving much closer to our desired transient levels. Group has also been a bright spot with premium business booking into Q4 and Q1 next year. Additionally, The College Football National Championship game and the FIFA World Cup will add compression and boost demand next year. In addition, we now plan to debut our signature dining experience, The Bazaar, by Jose Andres in early 2026, which should give us further momentum for next year as we expect the restaurant will serve as a dining destination for local residents and guests from nearby hotels. Elsewhere across the portfolio, we have begun a renovation of the meeting space in San Antonio. We expect to complete this project by year end and that we will have some headwinds in the third quarter while work is performed, which is included in our outlook. In San Diego, we are in the final planning stages for a renovation of the meeting space of our Hilton Bayfront and expect to begin work late in the year. We will complete the meeting space update in phases to minimize disruption. We are starting the planning and budgeting process for our capital investments for next year, and we'll have more to share with you on that topic in the coming quarters. While the transaction market has been more muted this year, we were pleased with what we were able to achieve on our sale of the Hilton New Orleans St. Charles in June. The heightened uncertainty that has permeated the operating environment since the start of the year has weighed on deal volume, but we were seeing some signs that the bid-ask spread is narrowing which could give way to some additional activity. We continue to seek out opportunities to drive growth and create value through a creative transaction activity, but remain mindful of the returns offered by other capital allocation opportunities. With that, I'll turn it over to Aaron. Please go ahead.

Thanks, Robert. As we noted at the top of the call, our earnings results for the second quarter were generally in line to slightly ahead of our prior expectations. even with only a partial quarters contribution from the Hilton New Orleans St. Charles, which we sold at the start of June. Stronger ancillary spend more than offset LIDAR Room's revenue growth and helped to mitigate margin pressure. Second quarter rev par increased 2.2% compared to last year, and total rev par grew 3.7%. Adjusted EBIT.RE in the second quarter was $73 million, and adjusted SFO was 28 cents per diluted share. We continue to benefit from a strong balance sheet, with net leverage of only 3.5 times trailing earnings, or 4.8 times, including our preferred equity. While our outlook has moderated, we still expect our leverage and balance sheet capacity to improve as we benefit from the embedded growth in the portfolio. As of the end of the quarter, we had nearly $145 million of total cash and cash equivalents, including our restricted cash. Together with capacity on our credit facility, this equates to over $600 million of total liquidity. Inclusive of the extension options available to us, we don't have any debt maturities for the remainder of the year, but we are in discussions with our bank group to address our 2026 maturities and extend the majority of our in-place debts. We will have more details to share with you in the coming months as those details are finalized. Included in this morning's earnings release are the details of our updated outlook for 2025. Our projections have been adjusted for the mid-year sale of the Hilton New Orleans St. Charles, and as Brian noted earlier, reflect a more cautious expectation for the remainder of the year. Based on what we see today, we expect that our total portfolio REVPAR growth will range from 3% to 5% as compared to 2024. This range reflects our revised outlook for ONDAS Miami Beach, including a moderated pace of ramp-up relative to what we assumed in our prior outlook. For the balance of the portfolio excluding ONDAS, we now anticipate that REVPAR will increase between 1% and 3%. As a point of reference for these updated guidance ranges, The 2024 REVPAR statistics for the total portfolio and for the comparable portfolio excluding ONDAH's Miami Beach were $216.86 and $225.31, respectively. With these revised top line growth projections, we now estimate that full year adjusted EBITDA RE will range from $226 million to $240 million. and our adjusted FFO per diluted share will range from $0.80 to $0.87. As it relates to some of the quarterly assumptions that comprise our updated four-year outlook, we would expect our total portfolio of rev car growth to be flat to slightly positive in the third quarter, before increasing more meaningfully in the fourth quarter, driven by greater contribution from ONDOT's Miami Beach, ongoing growth in Long Beach, and the easier comparison for the impact of the strike in San Diego. In terms of the distribution of our EBITDA by quarter, based on the midpoint of our revised outlook, the first half of the year contributed approximately 56% of our expected full year total. And we expect the third quarter to contribute approximately 20% to 21%, with the balance coming in the fourth quarter. Included in this distribution is the assumption that Ondas Miami Beach generates an EBITDA loss of $2 to $3 million in the third quarter, as it remains a low season in the market. While profitability at the resort will begin to accelerate as we move into the higher demand fourth quarter, we expect that the EBITDA losses generated prior to the resort's opening in May and during the slower summer months since that time will cause its cumulative performance to be a slight headwind to full year total portfolio earnings. As we noted in the 2025 outlook section of our press release, the remaining components of our full year projections remain generally consistent with our expectations from the prior quarter. Now shifting to our return of capital. So far this year, we have repurchased more than 11 million shares. Based on the midpoint of our updated range, our share repurchase activity will contribute $0.03 per share of additional FFO this year. On a full year run rate basis, this would equate to more than 6% increase in earnings per share. While we retain capacity for additional share repurchases, our updated projections do not assume the benefit of additional buyback activity. Separate from our share repurchases, our board of directors has authorized a $0.09 per share common dividend for the third quarter. and has also declared the routine distributions for our series H and I preferred securities. And with that, we can now open the call to questions. So that we are able to speak with as many participants as possible, we ask that you please limit yourself to one question. Operator, please go ahead.

At this time, I would like to remind everybody, in order to ask a question, please press start, followed by the number one on your telephone keypad. I would like to remind everybody, to limit themselves to one question, please. The first question comes from the line of Dwayne Fenningworth with Evercore ISI. Please go ahead.

Yeah, hi, this is Peter. I'm for Dwayne. Thanks for taking the question. So we appreciate kind of the context you provided about Maui and the different sub markets. But could you just elaborate on what you're seeing regarding the recent booking trends said maybe has ticked up a little bit recently. And what could be driving that? And then just to add on, have you quantified what the room renovation impact is at the hotel and when that renovation will be wrapped up? Thanks.

Morning, Peter. OK, so starting with the market recovery in Maui, and as you've heard on some of the other calls, when you look, you have to look at the sub market. So you look at Waialea where our Waialea Beach Resort is in, and then you look at Kaanapali, the west side of the island, that has been recovering from the fires. When you, our hotel competes in both markets. So we compete with the highest end of the Kaanapali market, and then we compete with the luxury of the Waialea sub market. Conopoly has been recovering and as of recently, it's moved up from call it 50% occupancy to closer to 70%. And so with the success of that market, then bring stability in their rate, which then brings the differential between their rate and our rate closer. which then allows us to grow our occupancy because we're no longer losing discounted rooms to that market. So when you look at Conopoly, the success of Conopoly is going to be translating into the success of Waialea. We always knew that we were going to lag that. And so as that market now reaches stabilization, it's our turn to grow. And so what we saw is As that as kind of probably got closer to the 70 ish percent occupancy, our leisure and we look at this our weekly leisure bookings started to accelerate in, you know, in the middle of July and going into August. So as we saw that those transient rooms looking into the next six months, our transient index recently has grown dramatically. So we were, you know, have gone from 102 index from an 84 index. And so also against the luxury set in YLA, we're growing there too. And so as we, you know, because the lead time booking into Hawaii is a bit longer than other markets, we're just, Q3 won't see a lot of that, but we are seeing that happening into Q4. And so when we look at the impact of Waialea, a big piece of it was in Q3 where we just did not get to the transient volumes that we were expecting. Q4 has better group base in it. It's a better group quarter. And combining that with the additional transient bookings give us more confidence that Q4 is trending up. Now, if the bookings we see right now for the last few weeks continue, there could be some upside there. But until we get a couple more weeks of that under our belt, I think that we're confident things are moving in the right direction, and hopefully we'll continue to see that growth. The renovation is complete. It was done towards the end of last year and into the beginning of this year. And so not only are we benefiting from growth in the market, but now we have a new product to sell also.

Thank you.

Your next question comes from the line of Doc Armstrong with Wells Fargo. Please go ahead. Your next question comes from the line of Danny Assad with Bank of America. Please go ahead.

Hey, good morning. Good morning, guys. So if maybe just in your prepared remarks, Aaron, you were talking about, you know, the change and the revision and outlook. Can you, you know, I think, I believe last quarter we were looking at a nominal contribution from Andaz, right? And now we're talking about a moderate headwind. So can you just maybe bucket that change in outlook, the $12.5 million EBITDA reduction? How much of that is coming directly from the change in ONDAs? How much of that maybe is coming from DC? How much is coming from Wyalaya? And if there's any other moving pieces, that would be really helpful. Thank you.

Sure, Danny. This is Aaron. Thanks for the question. Yeah, so as we think about just the evolution of the midpoint of the guidance range from last quarter to this quarter, based on what we shared in the prepared commentary, certainly a piece of that is the softness that we're seeing in Waialea as the other side of the island continues to normalize. As Brian alluded to, that is absolutely happening. And for this commentary that you may have heard from some of our peers that do own hotels over on the west side, it's evident in the trends that they're seeing. So that's a long-term good thing for the island, but it is causing some choppiness in the middle part of this year. And so that'll contribute to a portion of the revision Among the comparable portfolio, the other piece is going to be D.C. and just what we're seeing on the softer direct government business, and then also some of what we call government adjacent business, which relies on government funding, which has also been challenged here more recently. So if you put those two together, D.C. and YLA, they are larger contributors for us, and that's about a third of the total guidance provision, the contribution of those two hotels. The other part is the later start in the year at on does, which is causing the near term ramp to be slower than our expectations. As we alluded to, we're certainly starting to see the momentum and attraction that we want to see to position us to to get to where we need to be at the end of year at the end of the year so that we have a successful 2026. But the expectation now for 2025 from on does is that it will be a slight headwind from an overall earnings perspective this year. And that makes up about the other two-thirds or so of the change in the EBITDA and FFO revision. Across the rest of the portfolio, we've had some puts and takes that kind of largely offset each other. Certainly some strength in San Francisco, which has spilled over into the wine country, which is looking for a higher full-year number than what we had before. And that's offsetting some of the other changes across the balance of the portfolio.

Thank you very much. The next question comes from the line of David Katz with Jefferies. Please go ahead.

Hi, morning, everybody. Thanks for taking my question. You know, just noting some of the commentary about repurchases. How do you sort of think about, you know, a range of comfortable leverage? And, you know, how do you think about kind of those buybacks ongoing, right? I mean, in the context of, you know, not just your stock, but, you know, many of your peers are sort of below historical ranges. And I don't know that there's any valid argument that they're appropriately priced. I guess what I'm getting at is, you know, how much, what's your tolerance to buy back more than what you have?

Sure. Morning, David. Look, we continue to employ a balanced approach to capital allocation and with that capital recycling. We have repurchased, I think based on our market cap or our overall size, one of the larger amounts of stock over the last several years. So, we're absolutely not shy about doing that. And your question on leverage is the right way to look at it, is that right now our leverage gives us ample capacity and ample room to Increased leverage and we could probably increase leverage a turn and still stay within our range that you know we we believe is necessary and I think over time we've said this kind of four to five times You know that's EBITDA to be able to you know withstand any sort of Economics, you know cyclical up ups and downs that our space always sees so We feel the best way to allocate capital going forward right now is through recycling as we did with New Orleans. And we took an asset that we sold at an eight cap on 25 or eightish cap on 25 without any of the capital that we needed to put into it in a much lower cap rate with that capital. and redeployed it into our stock, which was trading at a higher cap rate. And quite frankly, while New Orleans was a fine hotel, our remaining portfolio is a much better quality. And so we'll continue to do that. And every time that there is capital to deploy, we look at what the options are on a risk-adjusted basis. you know, to your point, it's a pretty clear choice right now where assets, the limited number of assets that are trading, where they're trading in the market, and that spread, that bid-ask spread has come in a bit, but probably has some more way to go before it is competitive with share repurchase where stock is right now. And so, you know, that It's always a balance of leverage and capacity and other opportunities, but I think in the near term, whether it's using our balance sheet or trying to recycle additional assets where we can arbitrage private market valuations, we'll continue to do that.

Okay. Fair enough. Thanks very much.

Your next question comes from the line of Daniel Hogan with Baird. Please go ahead.

Hi, good morning. Thanks for taking my question. Just quickly, more broadly on group, for 26, what's the total pace? And then aside from the positive comments for the DC outlook, are there any other markets that are looking incrementally better or worse for next year?

Sure. Hey, Dan. So, we haven't given PACE for 26 yet, other than saying it's, you know, it's up, you know, at this point, kind of below single digit rating. When we look at citywide activity for 26, and then also looking into 27, in 26, DC, Miami, and New Orleans are the stronger markets. It's the 27, Boston, San Diego, DC, and Portland are all up. So again, looking at our portfolio, some of our larger assets have some good tailwinds going into the next couple of years. San Francisco is also looking good. When we look at our own internal pace in San Francisco, because the hotel does do a lot of just in-house business as opposed to citywide, our pace is very strong for San Francisco. So our expectation is what we're seeing this year, we'll continue to see that growth in San Francisco. And then also moving a little bit north up into the wine country, we expect good growth in that market also.

Okay, thank you very much.

Your next question comes from the line of Snedes Rose with Citigroup. Please go ahead.

Hi, thanks. Just two quick ones here. Are you still comfortable that ONDAZ can reach kind of high teams to $20 million of EBITDA contribution for full year 2026? And then, Brian, could you just isolate what the impact, what the positive impact the montage was from the real estate or the tax refund that you mentioned?

Sure. Morning, Smedes. From montage, it is about a million dollars of the of the positive. So even without that, the hotel is up materially about a million dollars quarter over quarter. And that really points to when you look at both wine country assets Luxury Leisure Traveler is still very strong. Four Seasons had an excellent quarter on the transient side. Montage, which is of the two, the more meaningful group house, had a fantastic group quarter. So both hotels, both resorts are growing, continuing to grow EBITDA this year. and have room to continue to grow as we move forward. And we're, you know, we're very optimistic of next year. With ONDAS, you know, looking at, you know, just kind of looking at the fourth quarter, our expectations and knowing that we are hitting or expect to hit the occupancies that we were planning on for the fourth quarter, although starting off later in the year and having to ramp up in the in the seasonally low third quarter um you know has led us to a slightly lower rate for the for the fourth quarter so that is you know while we're we're going to expect to hit the occupancy we were we were planning on the rate will be lower the market rate is actually higher than what we were expecting and what we had underwritten so You know, moving forward, yes, we think that there is absolutely, you know, while fourth quarter will be, you know, solid for us this year, next year we expect a lot more growth. Fourth quarter is typically, you know, 20 to 25% of the annual EBITDA. First quarter is about 40% of the EBITDA. So looking at our EBITDA expectations for the fourth quarter, I think our original expectation that we had was that the hotel would do 6 to 8 million of EBITDA this year and then growing next year, doubling and then moving into 27 to hit stabilization. Yes, we are confident of our growth next year. Given the start and some of the challenges we've had leading up to that, We're expecting to be at the lower end of that, but still within that range.

Thank you. The next question comes from the line of Dan Pulitzer with JP Morgan. Please go ahead.

Hey, good morning, everyone. Thanks for taking my question. Just a quick one on San Francisco. You guys mentioned that things seem to be getting better. I think you said it was the second consecutive quarter to meet your expectations. I mean, I recognize that this is coming off a pretty low base here, but what is it that you're seeing there? And do you feel like there's more substance to this or more of a glide path going forward? Or are we really just still kind of bumping along the bottom there?

Thanks. You know, I think we're definitely coming. I mean, we've definitely come off the bottom. There's a long way to go in San Francisco. And so some of the things that our hotel is benefiting from is one is is the ability to do in-house group and have meaningful meeting space that's that's been an important you know way that the hotel has been able to grow and outpace different sub markets i think that the location of the hotel while in the past union square would have been the first choice you know even for midweek business travel embarcadero is is definitely up there and the first choice now going forward. And so looking at the office space proximate to us, technology and AI and other investment is continuing to grow in that market. Our ability to place in-house group to be able to layer the The demands of the of the hotel and then also, you know, having a newly renovated guest room and and and having that in a market where you know some capital has. You know, been been deferred and delayed over the last few years. It positions the hotel well, and then when you look at the greater San Francisco market, you know citywide's have a long way to go, but they are growing. um the the administration and the the local government is focused on fixing a lot of the the issues from the past and when you look at the the overall you know surrounding and and safety and and that is definitely improving um you know maybe more so in embarcadero than in in union square early on but But that's something that I think long term the city is is pointed in the right direction and has, you know, has made some major steps, especially, you know, securing some of the larger citywide than the past. It had lost others. So, you know, I think there's a lot of positives in San Francisco. But to your point, it, you know, it had it was one of the markets that had fallen the most and it has the longest way to go. But we definitely see a multi year lift in this market and and think that our hotel has the right composition of meeting space and the right location and the right room product to be able to to grow with it and and have several years of of additional you know earnings and and top line growth got it thank you and then maybe just for my follow-up a more high-level question i think you touched on your capital allocation

priorities or strategy there. I guess that's a different way. You sold Hilton St. Charles. You redeployed that to buying back your stock. As we think about the next 12 to call it 24 months, do you see yourself as more likely a buyer or seller of assets, hard assets, and along with that, more likely or less likely to be a big buyer of your stock here? Thanks.

Sure. The answer is, it depends. First of all, in the transaction market, there have not been a lot of transactions. Transaction volume is down considerably and while refinancing and debt capacity is definitely there, whether it's the REITs or the private buyers, the equity has been a little bit more scarce. New Orleans was the right size of an asset in a transaction, and it was a good opportunity for us to redeploy into our own stock and use a little bit of our balance sheet too to redeploy into our own stock. Going forward, I think given the current environment, it's probably more likely that we would be a seller than a buyer, but Things can move really quickly and and our our view is that we will look to capital recycle. So if we look to sell a hotel then it's. The. Following that we we evaluate what the opportunities are out there and in the spot market right now. Yeah, the it's it's hard to imagine a an acquisition would be a meaningful would on a risk adjusted basis, we would provide a meaningful return over the repurchase of our stock. But things change. I mean, you go back in time and, you know, we were buying back shares and then stocks moved and we were able to find a good deal on the market and we acquired San Antonio and then things changed again and we went back and repurchased shares. So when you have a Yeah, when you have a smaller concentrated portfolio like ours, it gives you the ability to pivot and move in and out pretty quickly, which I think we've demonstrated over time.

Got it. Thank you so much. And your next question comes from the line of Chris Darling with Green Street. Please go ahead.

Thank you. Good morning. Brian, I believe you mentioned relative strength in Orlando in your prepared remarks. Can you elaborate on what you're seeing there, the outlook for that property through the rest of this year? And then do you have any updated thoughts on, you know, repositioning or perhaps densifying that property over time?

Sure. Yeah, you know, our location has improved recently with the opening of the new Universal Park, which is a mile and a half, two miles from the hotel. And so while we sit directly across from SeaWorld, the other two generators of leisure traffic in the market were kind of equal distance from those, which makes us not as convenient for any of, you know, either Universal or Disney. Having the new Universal Park close to us is a major plus. And when the hotel is looking to, you know, when they looked at their strategy this year, one of those, you know, one of the opportunities was to increase transient bookings. And this is a hotel that has always done well on the group side, has, you know, very good meeting space per available room, and has always just been a very, very strong group house. And so when we We've expanded the focus on on transient and we've also looked at other other segments of group, not just corporate, but but other segments to fill shoulder time periods. And I think that that's 1 area where the hotel has been very successful. It has had a phenomenal production year so far where it's put more group room nights on the books for. this year, next year, and following years than it had in the last five or six years. And so I think part of it is just looking and looking at different types of group business to go after. And then I think the other part of it is leveraging its improving location for more leisure transient.

I appreciate the thoughts.

The next question comes from the line of Jack Armstrong with Wells Fargo. Please go ahead.

Hey, good morning. Thanks for taking the question. In your view, at what point does the size of the company become a hurdle for potential investors? As we're thinking about your ability to set yourself up for earnings growth with acquisitions seemingly off the table at this point, where can you invest in the existing portfolio? How should we be thinking about CapEx in 2026?

Okay, great. So first is where, let me start with the second one and then I'll move to the first. So where can we invest in the portfolio for earnings growth? The good news is we've already been investing in the portfolio. And so the growth we're seeing this year in the repositioning of Long Beach, you know, while it's a market that does do some government business and has been you know, maybe hampered by that a little bit. It's year over year growth is still fantastic. And growth, you know, prior to renovation indexes, all those are moving in the right direction. So there's a place where we've invested in. Waialea, we updated the rooms last year and the beginning of this year. And so now that it's our turn for growth and the hotel, the resort has a, you know, good path ahead of it, we're able to capitalize on that investment. DC, a challenge market right now, but when you look at the repositioning we did and where that hotel is performing on a relative basis to its market in transient occupancy and rate, the re-flagging of that absolutely is paying off and made a big difference. And then some of the existing portfolio that has lagged, like San Francisco, should continue to give us growth going forward. And then ONDAWS will be kicking in into the third, mainly fourth quarter, and then into next year. So there is growth. already there that will that will create to us into 26 into 27. You know, we have invested in our portfolio. When you look at where the cyclical rooms renovations are coming up, Orlando will be that is the next where we have a you know, we'll have a renovation and we'll evaluate that. And as we get into next year, we'll we'll have more information on the timing of that. But even like smaller renovations that Robert talked about and the meeting space in San Diego, which is a very big group box. So updating that meeting space is something that's very important to the success and growth of that hotel. And so those things are all in the works or we have queued up or have already put in to be able to produce future growth. As far as the size of the company, I guess you can look at it a couple of ways. From a market cap perspective, we're within the range of our peers. On a hotel count, we're at the lower end. Are there others with less hotels than us? Yes. But we have a concentrated portfolio. We have a concentrated portfolio with great assets. You know you're going to be at the whims whim of of markets from here to there where we're seeing with DC. But you know, as far as you know, looking long term, do you want to have 20 plus acres in in Waialea? Is that a concentration that you can, you know, be happy with? I I think so. But you know, to your point, you know, can you sell assets and and repurchase shares forever. I guess, yes, you can, but that would bring an end at some point. I think our focus is more of just benefiting from our ability to be nimble. And so does that require you know, multiple asset sales and multiple acquisitions a year. No, it could be, you know, one or one or two could be meaningful. And so looking going forward, you know, we we recycled New Orleans and that went into stock because that made the most sense at that time. Going forward, our next disposition we do will evaluate and at some point it will, you know, at least if history repeats itself at some point, It will make sense to acquire assets, and we'll look to do that accretively. Until then, this is why we have the balance sheet that we do. We can redeploy into our own stock and create NAV and FFO per share growth that way. So I think we have multiple avenues at our disposal. We have the balance sheet to do it, and we have the size right now where where we can continue to go along this path and and and execute.

Great. Thank you. Our last question comes from the line of Chris Wawronga with Deutsche Bank.

Please go ahead. Hey, guys. Good morning. Thanks for taking the question. If we could maybe revisit morning, Brian, if we could maybe revisit Miami Beach for a moment. I assume you guys expect that's going to be a high redemption hotel, and I'm just curious as to whether there's any changes we need to think about in terms of if there are fewer or greater redemptions. Is that something that could ultimately impact your underwriting or your expectations for EBITDA generation? Thanks.

No, I mean morning Chris. So redemptions are are, you know. Depending on the type of hotel can be a very meaningful and important piece of. Of. So you know the segmentation and and quite frankly, a resort like this is why you know why loyalty programs exist. So you know the the you know members can use them at these highly desirable locations. And that's why they store up points and get points. And so, yeah, we have a lot of, we have a lot of experience and a lot of history with some high redemption hotels going all the way back to our days with the Doubletree, the Waialea, you know, New Orleans, Boston, Long Wharf, you know, is a big redemption hotel, especially for, you know, it's leisure traveler. So we always expected this to be a, you know, strong redemption hotel or resort. In Florida, in the Hyatt system, it's one of the premier options. So we expected early on, and we saw early on, very good redemptions. We expect redemptions to continue to be ongoing, a major part of the segmentation of this hotel. And with that, you manage around it based on the rules and the redemption, the way the redemptions work within the system, which quite frankly change year over year over year. And so we use it as a piece of the segmentation, and it's something that helps at times compress the hotel and drive rate higher, especially in high demand periods. But it's something that we expected. Maybe we're seeing a little bit more than we thought. And I think that just speaks to the quality of the hotel.

Okay. Gotcha. Thanks, Brian.

Our last question comes from the line of Logan Epstein with Wolf Research. Please go ahead.

Thanks for taking the question. I was going to ask a question on how you guys are thinking about giving up rate to get occupants in the hotel.

get occupancy in the door given several of the top performing assets in the quarter were on weaker rate but much stronger occupancy yeah morning Logan um it the answer is it depends on the hotel and so I'll give you a couple examples so when we opened up in in Q3 and in Miami Q3 is a seasonally low quarter. It produces about 8% of the EBITDA for the year on average for that market. And so as you're trying to build occupancy, yes, you're going to have to sacrifice some rate to do that. We were catching up to the market, so that was expected. We were hopeful to be opening in spring during spring break where it was higher compression that would have been an easier thing to do. But yes, you do that other places where you could see rate going down wine country. Part of that is getting the segmentation of the resort, right? So you want more group business group will tend to come in at a lower rate than transient, but also comes with between the montage and the 4 seasons 800 to 1000 dollars a night. per night, per room of ancillary spend. So, you know, in resorts like that, like Waialea, like Ondas, total rev par is very important. So you can give up some rates to bring in better, you know, group business that, you know, uses your banquets and all the other services of the hotel and gets you to a higher total rev par. So, you know, you have to balance that at each hotel and that's, you know, That's why you'll see at certain times occupancy going up and rate going down. It's usually a shift in the segmentation.

Thanks, Brian.

I will now turn the call over to Brian Gillia for closing remarks. Please go ahead.

Thank you, everyone, for your time and interest in the company. We look forward to meeting with many of you at upcoming conferences and look forward to walking many of you through the Ondas Miami Beach when we have the opportunity over the coming months. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. And you may now disconnect.