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spk06: Hello and welcome to the Xenia Hotels and Resorts Third Quarter Earnings Conference Call. My name is Juan and I will be coordinating your call today. If you would like to ask a question during the presentation, you might do so by pressing star 1 on your telephone keyboard. If you have joined us online, you can press the flag icon on your web browser to ask a question. I will now hand over to your host, Daniel Barcon, Vice President of Finance for Beijing. Daniel, please go ahead.
spk00: Thank you, Operator. Good afternoon and welcome to Xenia Hotels and Resorts Third Quarter 2021 Earnings Call and Webcast. I'm here with Marcel Verbas, our Chairman and Chief Executive Officer, Barry Bloom, our President and Chief Operating Officer, and Atisha, our Executive Vice President and Chief Financial Officer. Marcel will begin with discussion on industry fundamentals, our quarterly performance, and an update on our portfolio strategy. Barry will follow with more details about our operating results, recent operating trends, and status of our capital expenditure projects. And Atish will conclude our remarks with an update on our balance sheet. 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 their actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued this morning, along with the comments on this call, are made only as of today, November 2, 2021, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of our non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in this morning's earnings release. The property level information our executive team will be speaking about today is reported on the same property basis for 34 hotels, which excludes the Hyatt Regency Portland. 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.
spk12: Thanks, Danielle, and good afternoon to all of you joining our call today. The U.S. lodging industry continues on its path to recovery in the third quarter, as increased COVID vaccinations and continued strong leisure demands drove the highest occupancy the industry has experienced since the beginning of the pandemic. The U.S. RECPAR for the third quarter of 2021 decreased by only 4.8% compared to 2019, comprised of an approximate 6-point decrease in occupancy and 3.8% increase in ADR. The luxury and upper upscale segments have lagged lower tier chain scales in terms of the recovery to 2019 occupancy levels and experienced occupancy declines of 19.8 points and 20 points respectively compared to the third quarter of 2019. However, luxury ADR increased 15.9% and the upper upscale ADR increased 0.4%. The rate increases in the luxury segment have been impressive. and the positive signs we are starting to see as it relates to business transient and group demand certainly give us cause for optimism for a robust recovery in the segments where our portfolio is positioned. Similar to the rest of the logging industry, our portfolio faced some headwinds as the third quarter progressed due to resurgence of COVID cases from the Delta variants, a seasonal decline in leader demand, and a tougher comparison to 2019 in September due to the timing of the Jewish holidays. Given this backdrop, we were pleased with the 12% sequential improvement in our same-property RECPAR over the second quarter, especially since the third quarter has historically been our portfolio's toughest due to seasonality within our top markets. We were also happy to see that RECPAR declines compared to the same quarter in 2019 continue to moderate and that despite cancellations that were likely linked to the emergence of the Delta variant, business transactions and group demand appeared to increase as the quarter progressed. This trend has continued into the early part of the fourth quarter, with weekday demand continuing to strengthen. During the third quarter, we recorded a net loss of $22.2 million. However, adjusted EBITRE and adjusted FFO per share each remained positive at $35.4 million and 13 cents, respectively. Our year-to-date adjusted FFL also turned positive as a result of our third quarter performance. We were particularly encouraged that 33 of our hotels and resorts achieved positive hotel EBITDA during the quarter. Our same property portfolio generated a hotel EBITDA margin of 23.8% for the quarter as a result of a continued focus on cost controls and aided by flow through from cancellation fees recognized during the quarter, as well as a shift in revenue mix at our properties. which reflects the higher contribution from rooms revenue than historical averages. Our same property record for the third quarter was $123.70, which represents a 23.1% decline through the third quarter of 2019. A substantial improvement from the 64.3% and 38.7% declines in the first and second quarter. Our managers did an excellent job maintaining rate integrity which resulted in same property ADR of $224.54 for the quarter, a 6.5% increase compared to the third quarter of 2019. An impressive 24 of our hotels and resorts achieved ADRs that surpassed those reached during the same quarter in 2019.
spk08: While the quarter started off strong, demand levels began to moderate somewhat in mid-August through mid-September.
spk12: By the second half of August, The Delta variant was driving an increase in COVID cases, particularly in the Sunbelt region, where a significant number of our hotels and resorts are located. However, despite group cancellations impacting our portfolio, occupancy for the third quarter finished at 55.1%, a high watermark since the beginning of the pandemic. September ADR was the highest we have achieved this year. continuing the trend of every month and a quarter, surpassing the average rates for the same months in 2019. Business transient demand levels began to accelerate mid-month, as evidenced in our improving weekday occupancies, and these continued to improve during the month of October. Based on preliminary data, our estimated occupancy for October was approximately 58%, and ADR was approximately $245. The resulting Ref Bar of approximately $143 substantially exceeds our July Ref Bar, further highlighting the petite strength in leisure demand and improving business demand both on the transient and group sides. While October has provided a promising start to the fourth quarter, we believe our portfolio of recovery will truly accelerate as business transient and corporate group demand approach normalized levels. While we have seen improvement in these segments, We believe this will be a gradual process, particularly as we enter the seasonally weaker months that lie ahead. The recent resurgence of COVID appears to be behind us at the moment, but we remain cautious about potential future resurgence during the winter, particularly in colder climate states. However, leisure demand has remained strong and has consistently exceeded our expectations over the past several months. We expect this strength to continue as we enter the holiday season. We believe our strategy of owning a geographically diverse portfolio of high-quality luxury and upper upscale hotels and resorts continues to show its value. The sequential improvement in our portfolio's performance, quarter over quarter, is reflective of the benefits of our longstanding focus on investing in Sunbelt and drive-thru leisure locations and the desirability of our hotels and resorts to various demand segments. Our higher concentration of luxury assets, with this segment comprising 30% of our portfolio, has also proven to be helpful. As required, these properties increased by approximately 30% over the second quarter. Our portfolio was able to maintain healthy margins this quarter and generate positive adjusted FFO each month, as we have been able to do since March of this year. The management teams at our hotels were able to flex operations to align with fluctuating demand levels. This quick and nimble response was the result of the lessons learned over the last 18 months as our managers have rebuilt operations from the ground up, and it is a testament to the success of our strategy of partnering with the best-in-class brands and managers. We continue to believe there are meaningful embedded growth opportunities within our portfolio. While we primarily measured the pace of our portfolio recovery in comparison to 2019 performance, hotels even out at approximately half of our properties peaked prior to this time. As a result, We anticipate incrementally greater growth opportunities in the years ahead for a number of our properties in our top 10 EBITDA-producing markets, such as Houston and Orlando, as well as in some of our smaller markets. Additionally, we continue to be optimistic about three of our previously highlighted properties that could create a significant incremental hotel EBITDA over 2019, Park Hyatt Aviara, Hyatt Regency Grand Cypress, and Hyatt Regency Portals. While occupancy at Park High at Aviara continues to build and will not stabilize until group business has returned in a more meaningful way, the resort achieved some remarkable results in several metrics during the third quarter. ADR at $558.30 per quarter was nearly double what it was in the same period in 2019, driving an almost 30% increase in rep art. Additionally, the resort's hotel EBITDA margin was more than 800 basis points higher than the third quarter of 2019. These results give us great confidence that the expectations we had when we acquired and renovated the resort will be met or exceeded in the years ahead.
spk08: At Hyatt Regency Grand Cypress, we continue to be optimistic about the long-term benefits of the additional ballroom we created at this resort.
spk12: While group business overall is recovering gradually, 2022 group booking phase of this property remains promising. At the end of the third quarter, high-agreedancy grant ciphers ranked number one in our portfolio as it relates to room nights and revenue on the books for 2022. And it is not far behind its group phase for 2019 at the same time in 2018. We remain confident that the additional ballroom will drag the incremental revenue we projected as group business continues its recovery in the quarters and years ahead. Hyde Regency Portland lacks the rest of our portfolio as the business environment in Portland and the state of Oregon remains challenged. With this hotel only having been open for a limited period in early 2020, we are truly building the business as opposed to looking to recover to prior levels. With this hotel intended to be group focused, we are dependent on group business in the state and region recovering before we will approach stabilization. In the meantime, We are pleased that the management team has been successful in attracting leisure and business transit demand at levels that continue to support our decision to reopen the hotel at the end of May. We are also encouraged that the hotel has over 50,000 group room nights on the books for 2022, which represents the second highest number of group room nights in our portfolio. While there obviously continues to be some uncertainty about these groups actualizing,
spk08: This group phase does demonstrate the appeal that the property has to groups and meeting planners alike. I will not turn briefly to the transaction landscape.
spk12: We have not seen a significant shift over the past few months as it relates to the quantity and quality of acquisition opportunities in the market. I spoke last quarter about our ability and willingness to remain patient as it relates to potential acquisitions, and that we believe that more and better opportunities are likely to surface as the recovery progresses. We continue to evaluate a pipeline of potential transactions, but will remain disciplined as we analyze and pursue potential additions to the portfolio that could enhance our growth prospects. Meanwhile, we remain focused on internal growth opportunities through asset management optimization and various ROI projects within our existing hotels and resorts, which in many cases are still relatively recent additions to our portfolio. Barry will now provide additional details on our third quarter performance, recent operating trends, and the status of our current capital projects.
spk09: Thank you, Marcel, and good afternoon, everyone. For the quarter, our portfolio occupancy was 55.1%, an average daily rate of $224.54, resulting in a red bar of $123.70. As a reminder, REVPAR in the third quarter of 2020 was $42.09, and in the third quarter of 2019, it was $160.79. The sequential improvement quarter over quarter, given the headwinds faced the last few months, gives us optimism about the trajectory of our portfolio's recovery. July was a particularly strong month, with IPMZ reaching 59.1%, a new high for 2021, and an ADR of $224.23, which represented a 9.3% increase to 2019. The month benefited from the Fourth of July holiday and five weekends, which averaged 72.4% for the month, and allowed our hotels to capture additional leisure demand. We had 7 hotels that achieved occupancies over 80% during July, primarily hotels in our leisure-focused and drive-to markets, such as Charleston, South Carolina, Savannah, Birmingham, Key West, Santa Barbara, and Napa, all of which continue to show substantial strength. We also had 12 hotels that exceeded their July 2019 ADR by over 20%. In August, we began to see some moderation in occupancies during the month due to the seasonal decline with the beginning of the new school year and the spread of the Delta variant across the Sunbelt region. As a result, August occupancy dropped seven points from July to 52.1% and an ADR of $218.12. On August 29th, Hurricane Ida made landfall in New Orleans, Louisiana as a Category 4 storm. Our Lowe's New Orleans hotel incurred property damage from the storm we believe will exceed our maximum deductible for this loss of approximately $4 million. In addition to our property damage insurance claim, we are currently evaluating our ability to recover proceeds for lost profits under our policies which we would expect to settle in 2022. Moving to September, while we saw a boost in leisure transient demand over Labor Day weekend, it was slightly below occupancies reached over the Memorial Day weekend. Heading into the quarter, we had anticipated a pickup in business transient and corporate demand following the holiday. While we experienced an increase in weekday occupancy mid-month, it was somewhat muted due to the resurgence of COVID cases and a further pushback in the return to office timeline for many large employers. The month also had a tougher comparison to 2019 due to the timing of the Jewish holidays. September occupancy improved by two percentage points over August to 54.1%, and ADR rebounded as well, increasing 6% from August to $231.26. Group cancellations in the quarter, which Marcel mentioned, amounted to approximately $5.4 million of rooms revenue, which had been on the books for the third quarter of 2021, and an additional $7.8 million for the fourth quarter of 2021. We recognize $3.5 million in cancellation and attrition fees during the third quarter. I will discuss 2022 group pace in more detail shortly. We saw strong growth across many of the markets in our portfolio in terms of average daily rates. Compared to the third quarter of 2019, we experienced ADR growth in several of our top 10 EBITDA contributing markets, including San Diego of 64.2%, Phoenix of 39.9%, Atlanta of 13.8%, Orlando of 10.7%, and Houston of 8.3%. During the third quarter, we had an impressive 24 individual hotels and resorts that surpassed ADRs achieved in 2019, including all-time record highs at Ondaw's Napa and Park High and Aviara Resort and Spa. In terms of profit, 33 of our 35 hotels achieved positive hotel input after the quarter, with 13 properties exceeding results compared to the third quarter of 2019. Nine hotels achieved EBITDA margins greater than 30% for the quarter, and 22 hotels generated EBITDA margins greater than 2019, aided by lower-than-expected labor costs and real estate taxes and cancellation of nutrition income. compared to 2019, which handily exceeded the 25.6% decline in revenues, while undistributed expenses, often considered to be largely fixed in nature, declined by 19.7%, led by significant declines in administrative in general and sales and marketing expenses. Total payroll and employee benefits expenses declined by 32.4%. In terms of labor, our hotels still have many positions open due to the shortage of applicants in the market. However, our operators made significant headway this quarter in filling key property-level management and line operating positions. I want to spend the next few minutes sharing recent operating trends we have witnessed over the past quarter. Weekday occupancies in the third quarter continued to trend upward and exceeded those achieved during the second quarter by approximately 4.7 occupancy points. The most significant gains were achieved on Tuesday nights, indicative of the increase in corporate transient demand. We continue to experience additional gains in weekday occupancy in October. In terms of corporate trends and booking trends, we have yet to see a meaningful increase in volume from Fortune 500 companies. However, there continues to be stronger growth from smaller national corporate accounts, as well as local corporate accounts, whose volume is improving each month. Corporate trends in business from large volume of accounts grew approximately 16% from Q2 to Q3. On our last earnings call, we shared that leisure booking windows had lengthened over the summer months. We are now seeing a similar trend shaping up for the last few months of the year, aided by the upcoming holiday season. This lengthening of the booking window has continued to allow our hotels to drive even further rate increases than what we saw over the tail end of summer. Based on the Friday and Saturday occupancies our portfolio experienced in October, including achieving two of our five highest occupancy nights this year, it appears that leisure demand remains healthy and stronger than we had anticipated heading into the fall. As a reminder, approximately 30% of historical rooms revenue was driven by group business, which encompasses corporate, association, and social groups. In the third quarter, group represented approximately 20% of rooms revenue. Group pace for the remainder of 2021 was negatively impacted by the significant number of cancellations from the resurgence of COVID cases in August. at the end of september group revenue pays for 2022 was down approximately 31 compared with our position at the end of september 2018 for 2019 with rate up approximately three percent group revenue on the books for 2022 continues to increase steadily was up 27 percent at the end of september in comparison to where we stood the end of june with most of the increase falling into the second and third quarters 2022 i will end my remarks today with a few updates on capital projects in progress for the year In the third quarter, we spent $7.3 million.
spk08: We continue to estimate spending approximately $40 million on capital expenditures for the full year. The restaurant and lobby renovation at the Ritz-Carlton Pentagon City was completed in mid-October.
spk09: This restaurant has been well received, and we are pleased with how the look and feel of the restaurant and lobby integrates with the meeting space we renovated last year. We believe these improvements will position the hotel for continued success. The development of the Regency Court, a new outdoor social venue at our Higher UC Scottsdale Resort and Spa, was delayed primarily due to weather-related issues, but is expected to be completed in mid-November. This significant increase to the hotel's outdoor meeting space has already generated considerable interest for incremental social and corporate events. The restaurant lobby and guest room renovations at Waldorf Astoria Atlanta Buckhead are nearly underway and are expected to be completed in the first quarter of 2022. We believe this comprehensive renovation will secure the property's position as a preeminent luxury hotel in the Buckhead market. Last quarter, we announced the plans for comprehensive renovations of Grand Bohemian Hotel Orlando and the Kimpton Canary Hotel Santa Barbara, both of which will encompass renovations of each hotel's guest rooms, restaurant and bar, lobby, rooftop pool area, and meeting space. We are pleased with the early design efforts for these projects, which will create a lighter and more contemporary look and feel for each property. Work on these two projects is expected to begin in the first quarter of 2022, with estimated completion dates in the first quarter of 2023. These projects are being completed in phases to minimize guest experience disruption and financial impact. With that, I will turn the call over to Atish. Thank you, Barry.
spk12: I will provide an update on our balance sheet. Our balance sheet continues to be strong with no debt maturities until 2024. Over $1 billion in liquidity and strong banking relationships we are in a good position to take advantage of opportunities. We continue to believe that our business will be cashflow or FFO positive going forward. And as we look ahead, we expect our properties will continue to pivot to capture what demand is present with a focus on controlling expenses. As we look further out, we believe our assets are well positioned as the rate of new supply growth decline. Properties and markets such as Houston, Orlando and Atlanta are expected to see lower levels of new competitive supply growth. Our portfolio consists of well-located higher-end properties that we expect to continue to recover well, particularly as corporate transient and group demand recovers.
spk08: And with that, we will turn the call back over to Juan for our Q&A session.
spk06: If you would like to ask a question, please press the star followed by one on your telephone keypad. Now, if you change your mind, please press the star followed by two. For those who have joined us online, please press the flag icon. When preparing a question, please ensure your phone is unmuted locally. Our first question comes from David from Jefferies. Please, David, your line is now open.
spk01: Hi, everyone. Good afternoon. Thanks for taking my question and for all the information. Earlier on, Marcel, you indicated that there is a pipeline of opportunities out there and to the degree you can, I'd love to just have you elaborate on that a little bit. The focus on the Sunbelt area has been pretty productive so far and fortuitous. Any geographic or size or cap rates perspectives would be helpful on, you know, what might work in this environment.
spk12: Yeah, good afternoon, David. You know, like I said, our situation as it relates to our pipeline today is probably not too different from where we saw it last quarter, as I mentioned in my remarks as well. So we're, you know, we're looking at a number of opportunities, and we've certainly underwritten a good number of opportunities here in the last quarter or so. But I really feel like the pipeline is still relatively limited compared to where we think it will be in the quarters and years ahead. So I mentioned last quarter that we felt that expectations that sellers had on some of these assets were still a little bit beyond where we were comfortable, you know, stretching to get deals done and didn't really feel the need to go that far, particularly given the internal opportunities that we still have in our portfolio with some of the assets that we bought coming into this. So, you know, I'm not sure that I can give you a whole lot more color than that, except for to say that, you know, what we could see in unrivaled assets, but haven't really found the type of deal and asset that we think is a great strategic fit for us at a price that we're comfortable transacting. And yeah, to your point, as far as it relates to kind of our focus, we continue to look at what has worked well for us, obviously. We have a very significant Sunbelt presence. There are markets where we aren't in yet that we'd like to get in over time, but the time has to be right and the asset has to be right to get into those markets. And there are certain markets still where we have some presence where we wouldn't mind either upgrading our presence over time or increasing our footprint a little bit. So, you know, largely we're going to stick with the strategy that you've seen from us over the past few years as it relates to any new opportunities that we would pursue.
spk01: Right. And if I can appreciate that, if I could follow that up, are there areas somewhere on the board, and I guess I can't imagine you might name them in this forum, but areas where you would consider lightening up where you may be a little heavier?
spk12: Not particularly. You know, as you know, we've always been pretty careful about not getting overexposed in any particular market, which is, you know, really kind of set us apart a little bit from where our peers were certainly over the last few years, where some of our peers went pretty heavily into certain markets. Our philosophy has always been to be a little bit more diverse in the markets that we play in. Historically, kind of the top level where we were comfortable being in a market was somewhere in the 10% type range. We're a little bit higher in a couple markets just because of some dispositions that we've done over the past few years. But we think that this will balance out again over time. So there's no particular market where we say at this point, this is where we'd like to lighten the load or anything like that. We're pretty comfortable with where the portfolio stands right now. As you know, we've talked about this a lot. You know, we'll always continue to look for opportunities to strengthen the portfolio and upgrade the portfolio over time. So particularly when we have some of these bigger CapEx decisions coming up on some assets, we'll do that very in-depth wholesale analysis to see if it makes sense to potentially sell an asset or two. But we find through the portfolio a lot. So we're happy with where we stand. And certainly you can expect us to, you know, on the margin, sell some assets over time. But we'd like the focus to be a little bit more on the acquisition side here in the short and mid-term.
spk01: That's perfect. And if I may ask one additional question, which is about labor and the cost thereof, I think there's little disagreement, you know, that it is an issue. I think where there's more debate is how long it lasts. And I would welcome your opinion on that as well.
spk09: Hey, David, it's Barry. You know, I think it's really hard to gauge how long it lasts. Certainly, we continue to encourage our managers, and they have put in place their own programs to really make sure that, A, they're hiring quality labor, B, they're hiring the right amounts of it so that they're not ahead of where business levels are, and C, I think, really try to ensure that they're paying a market competitive wage. I think Knowing if, when, or how that changes course, I think, is really hard to determine because we're still in, A, still in the thick of it, and B, certainly looking forward to generating higher occupancies, which will require in the near midterm more employees.
spk01: Understood. Thank you very much.
spk06: Thank you so much. Our next question comes from Bill Kraft from Raymond James Financial. Please, Bill, go ahead.
spk07: Yeah, thanks. Good afternoon, guys. Is it fair, I was trying to read through your comments earlier, Marcel, about kind of the upcoming calendar, and if you think about historical leisure trends and where we are in business transient, is it fair to consider kind of January, February are going to be pretty weak? As we stand today, is that kind of the way you're thinking about as we roll through the next few quarters?
spk12: I wouldn't necessarily say that, Bill, because in our portfolio, we do have some seasonality that helps us a little bit in the first quarter, too. As you know, especially in markets like Phoenix, Orlando, those are historically some stronger months from a seasonal perspective on the leisure side particularly. I think it's more a matter of kind of looking at the next couple of months and saying, you know, you get post-Thanksgiving where you're always starting to see a little bit of a letdown generally on business travel and group travel. And that's more, you know, some of the seasonally weaker months that I talk about in a normal situation, particularly in the fourth quarter where October is generally very strong. The first half of November remains strong. And then after that, obviously, business starts to tail off a little bit. What we're certainly hoping for is that some of these back-to-office trends will improve a little bit, where we're starting to hopefully see some more people getting back in the office, which will spur some more business travel kind of going through those months coming up. I will say, looking into next year, that the first quarter is a little bit weaker for us from a group-based perspective than the rest of the year. And I think some of that was also still impacted with some of the cancellations that Barry talked about. as COVID was kind of rearing its head a little bit more again. But, you know, we're hopeful going into, certainly based on the trends we're seeing on the leisure side, you know, we're very hopeful that that will continue through to holiday season and provide some strength for us on that side.
spk07: All right. And speaking of the group cancellations, I think Barry mentioned maybe $3.5 million of term fees collected, or I should say cancellation and attrition fees collected. I'm just curious, what that looks like for the fourth quarter.
spk09: It's a little too early to to think about that because there are still accounts out there that could still actualize versus not. And the way the revenues record is when they actually don't attend a program. So it's really too early to put a number of any kind of magnitude at this point.
spk07: So the majority would not necessarily be in October. It could be in November, December as well. Yeah. Yeah. Yeah. Okay. That's it. Thank you.
spk06: Thank you, Bill. Our next question comes from Brian Maher from Bill Riley Securities. Please, Brian, your line is now open.
spk03: Thank you very much. Maybe a question for Barry. I'm interested, so much has been talked about with labor costs and labor shortage, but we've noticed a pretty meaningful uptick in your food and beverage revenue. And I'm curious as to what you're experiencing on food and beverage costs, the impact on margins, and then secondarily on other supplies, if you're finding any problems getting stuff like towels and other supplies through the supply chain that we keep hearing about so much.
spk09: Yeah, really good on-point question. We've certainly been talking about here over an extended period of time. I guess kind of taking a little bit in order, food and beverage staffing other than culinary has actually not been a challenge as we ramped up in part because in most markets banquet servers are often on call and work at multiple properties and they seem to be quite available given the amount of uh business the hotels are generating at this point so that's kind of one item food costs we've actually although costs are higher than they might have been by a few hundred basis points they've been pretty stable uh in our portfolio each month through this past quarter i think and i think as it relates to kind of guest supplies whether that's towels or or other operating supplies i think this is one of the cases where Affiliation with the biggest brands has been really helpful and many of their relationships with the vendor has been very helpful in that. They're kind of at the front of the line for getting supplies. We had a couple months. Back in Q2, where we had a couple of hotels that some challenges with sheets, for example, but that really kind of went away in the 3rd quarter. And again, as we've seen kind of the bigger brand hotels, get to the front of the line for supplies. I think hotels have gotten a little smarter, more educated about thinking about when they're going to need those kinds of supplies and making sure they get their orders in earlier used to be kind of order a week or 2 out. That's changed. There's a longer lead time on those, but we are seeing. relative success from the hotels in inability to acquire whatever kind of physical goods they need.
spk03: Okay, thank you for that. And just one question on the Grand Bohemian. That hotel had, and probably still has, quite a bit of character to it. And so I was interested in your comment on having a more lighter contemporary look and feel to it. First of all, can you quantify roughly how much money you're going to be spending on that renovation, and how much are you going to kind of de-characterize it, for lack of a better word?
spk09: Yeah, on the cost. We'll probably have a better handle and talk about that as we head into Q1 of next year. So we'd like to hold off on that for now, particularly as we're kind of working through a lot of the design and working on adding and subtracting components from a value engineering perspective. So appreciate some flexibility in that. I think everything we're doing with any of the hotels is really in keeping with the character of the hotel on the market, there is actually some deep theming to Grand Bohemian that is culturally related and that a major part of the design team effort has been to make sure that that's retained while creating a look that's different, quite frankly, than the hotel had 20 years ago. There's certainly been an evolution in hotel design, and part of our feedback over time has been that it's the dark colors and perhaps by some, in some opinion, over-hearted nature of the property that people perceive as detractors in the current environment. And those are some of the things we're trying to solve with the design team to create that fresher, lighter look. Okay, thank you.
spk06: Thank you, Brian. The next question comes from Ari Klain from BMO Capital Markets. Please array, your line is now open.
spk04: Thank you. Maybe following up on the S&B costs, have you started to pass any of those along in the form of either higher menu prices or other ancillary items like parking to customers, or are you still holding off on that?
spk09: Yeah, no, absolutely. We have and that's been probably our asset management team and our portfolio initiatives teams biggest efforts through the last few months has really been looking at how do we make sure that that we're taking advantage of the reverse side of inflationary costs that we're paying in the hotels. And I think as inflation become part of the. the common vernacular in the U.S. that people are expecting to pay more for most things, and we don't have a single hotel that hasn't gone through adjusted pricing. I'll tell you, as we've spent the last few weeks kicking off the 2022 budget season, and the asset management team and I have been out at the hotels, that's a major part of the dialogue, which is if costs are going up X, revenue needs to go up by Y, because we need to not only maintain our profit margins, but where we can improve them. And this is, we think, we view it as some of the unique moment in time while inflation is on people's tongues and while they're seeing it in the grocery stores and in the gas stations and in the retail auto market, that it's a real opportunity for us to move revenues as costs increase as well.
spk04: Got it. And then on the business trend and improvement trends, you're starting to see midweek. Can you give us a sense of from a market standpoint, you know, which ones maybe are doing best and which ones are lagging. And then how much of business transient is typically those large corporate accounts that are, you know, a little bit slower to recover here.
spk09: So, in answer to the 1st part, it's really been pretty consistent across the portfolio. There are very few hotels. We can point to that are that are lagging. In fact, the hotels that that you might view as a little more corporate. So, if you think about our hotels in Houston and Dallas and the San Francisco Bay area, they're actually seeing the biggest increase in those right now. And of course. They had the longest room. They had the most room to run because they hadn't been as successful in filling weekday nights with leisure business as some of the other markets that we're in. So I think that addresses that piece.
spk08: And then help me with the other part of the question, Ari, if you would.
spk04: Just on how much of business transient is typically those large corporate accounts that maybe have been a little bit slower to recover.
spk09: yeah so the the way we've accumulated that data over time it's a little different to a little difficult to look back and see kind of what that has been we look more on kind of across the portfolio on an account by account basis and how they're going over time and looking in particular at the big four accounting firms and the large consulting firms and the fortune 500 names and they're they're down significantly from where they were i think you'd certainly say in the you know, more than 50 percent or probably less than 80 percent, but I'm thinking about that on an account-by-account basis, so that may not translate to those on an aggregate basis.
spk04: Got it. Thank you.
spk06: Thank you, Eric. The next question comes from Austin Wolfsmith from KeyBank Capital. Please, Austin, your line is now open.
spk02: Yeah, thanks. I'm not sure if this is what Ari was just getting at, and I may have missed it, but can you put some detail? You mentioned group, I guess, is 20% versus 30% historically. What's sort of the leisure BT mix today versus historical levels?
spk09: yeah it's really hard to to it's always been a little hard to discern that because obviously we don't you know no one states up front whether they're for business or leisure and there's no no doubt in the portfolio we've seen this you know concept of leisure really kind of looking different than it has historically where sunday nights are almost as good as as monday nights and thursday nights have become uh a real swing night that substantially better than has been historically on a relative basis to Tuesday, Wednesday. So we know we have a lot of guests who are making combined stays and we've seen that average length of stay in the corporate segment increase significantly. And in fact, it's increased so much that sometimes I question the data, but what I think it really is, is corporate customers that are extending their stays into and onto weekends and meeting and having families meet them or spending extra time in a market. But to really break that down precisely right now between business and leisure, I think is a really difficult thing to do.
spk02: Got it. No, that's helpful. And then can you just provide some additional detail? I mean, the AGR trends month to month versus 19 have certainly moderated since July. And I assume that The leisure component trailing off a bit is some portion of that. But is there anything else that's going on sort of under the hood? Or can you give us a sense where that corporate rate is trending maybe versus pre-pandemic to help us better understand, as we think going forward from here, what the ADR trends could look like?
spk09: Yeah, I think when you kind of work your way through the quarter, and then particularly as you work your way into October, what you're seeing is really a change in mix where there is significantly more corporate demand. And that demand, I think we've had great fortune with the leisure guests throughout the industry and certainly in our portfolio where that guest has gotten accustomed and trained to, if they want to stay in their first choice hotel, They need to pay a pretty good rate to do it and the hotels have not resorted to significant price lowering and discounting the way they may have in prior cycles. I would suggest that I think as we look at the data across our portfolio, corporate rates are generally flat. to where they were in 2019. So again, and we've seen, I think that's also, again, reflective of not a race to the bottom in corporate rates. And in fact, a lot more accounts have moved from static rates to percent discounts off of bar, which is also helpful because obviously each individual hotel controls bar on a day-to-day and week-to-week basis. So I think what you're seeing in that trend is really just mix of business versus leisure as business travel is increasing. You didn't mention it, but I'd add group into that as well. And the group rates, quite frankly, particularly through certain months of the year, because of the volume of food and beverage business they do and because it's directly negotiated, are often some of the lower actual rates that hotels achieve. So you're also seeing that mixed in to this blended rate as well. And again, it's recovering at a rate as well.
spk02: No, that's helpful detail as always, Barry. And just kind of piggybacking off the last one, just on the leisure side, what's sort of your house view on the sustainability of pricing power amongst leisure customers over the next 12 to 24 months?
spk09: Yeah, I don't really have a house view on it over 12 to 24 months. We certainly feel good about what we're seeing in the 90-day forward bookings on leisure, which take us through Through the holiday season and obviously feel pretty good about that. You know, I, I think. I think there's certainly a view that we've, in many cases, broken through to new and higher ground, and quite frankly, higher ground than we would have expected or naturally would have gotten to. But I think there's a lot to be said for the retraining of the consumer that this type of hotel costs this amount of money. And you're not seeing it, as you probably know, only in the luxury and upper upscale segments, but you're seeing it in the select service properties as well, where they've really gotten some pricing power with leisure. And I think that as, if and as we stay in kind of this newfound inflationary environment, I think people are expecting to pay more. And I think, don't see any reason to think that that will necessarily change materially going forward.
spk02: I appreciate the time. Thank you.
spk06: Thank you, Austin. first. Please, Michael, go ahead.
spk13: Thanks. Good afternoon, everyone. Barry, I have another question for you also on F&B, but I want to focus on revenues. It looks like F&B revenues, I think they were down about 15 more points than room revenues on a two-year basis. How much of that is due to group lagging versus because some of your restaurants and outlets are still closed? And how do you think about the ramp-up of the F&B revenues aside from group over the next 12 to 24 months.
spk09: Yeah, it's interesting. In our portfolio, I would say that almost all of the decline is banquets related. We, as I think we've talked about before, we've made great efforts in our hotels to make sure that we have food and beverage outlets open and operating. In our resorts, our outlet food and beverage revenues have set Set all time records literally every, every week, maybe not every day, but certainly every week and month through the summer months in terms of that leads your guests being very Catherine resort, buying a lot of beverages, the pool, having more meals on property. It's been a really favorable trend. So we think, and our data tells us that the real gap. is on the banquet side, and as group business recovers, we're actually seeing really good results in banquets on a per-occupied group basis, and our catering and events people are telling us and the numbers are showing us that they're doing a really good job of capturing bankrupt business, that more groups, when they come to properties right now, are staying on property as opposed to doing more off-property events, which is great for the hotels. They're also buying the same or better quality and cost menus than they had been buying pre-pandemic. And that has gotten even better as the group has shifted more from that smurfy-type business and we're adding more and more traditional products
spk08: higher caliber corporate groupists. Got it. That's helpful. That may be more than you asked for, but I'd give it to anyone.
spk13: No, no, that's helpful. And then the second part of the question, maybe Atish can chime in too, but just your longer term outlook on margins, has that changed at all? And when do you think the brands formalize their brand standards for 2022 and beyond?
spk09: Yeah, you know, Mike, I think it's been interesting to see that, and we're still certainly waiting to see what the brands really want to ensure happens in terms of housekeeping. We continue to do a lot of experimenting within our portfolio and many of our hotels, as you can imagine, given our profile with the brands, you know, are serving as betas for a lot of, the things they're trying in terms of light touch housekeeping and how effective is that and what the housekeeping piece looks like. I think it's just too early to really think about what margins look like overall as we get to stabilization. I think certainly we've Proven we can operate with fewer bodies in the business and the hotels can run. Well, but I do think we're going to see over time. We will see additional staff and we're not going to have we're not going to have the labor below labor costs. We've necessarily run, particularly in Q2 of this year when hotels were significantly understaffed and that we've got to at some point. get to a place where we are reversing the downward trends everyone's seeing, although it's really stabilized now, but much, much lower guest satisfaction scores, which I think are directly related to both labor, the amount of labor in hotels and the amount of services the hotels are providing to guests. And those are obviously the tradeoffs and what makes it hard to know where that shakes out on cost relative to revenue.
spk08: Got it.
spk13: And then just last one for me on the transaction front for you, Marcel, just in terms of the deals that you've looked at, you haven't done, or the ones you've passed on, is it simply because you can't get to the pricing level that the seller wants? Or is it because maybe you're more turned off by certain qualitative factors like location, urban versus resort, or other aspects of a particular deal?
spk12: Yeah, you know, it's obviously a combination, right? I mean, you start off with kind of looking what's out there in the market and seeing what do we think is something that we think is really additive to the portfolio and something that helps our portfolio from a growth perspective. And something that might work for someone else isn't going to work for us just because of what the makeup of a portfolio currently is already. So certainly there's product out there. There's no question. but there's not a lot of product out there that kind of rises to the quality level that we want to have in our portfolio and that we want to grow with. So that's the first component, though, is knowledge and location plays into that and, you know, where are assets out there that fit our portfolio well or not. And then, you know, when you kind of drill it down and you end up with a relatively small pool of potential assets that really do fit well for us, and we just haven't found that deal where we felt like the pricing really matches our outlook of cash flow in both the short term and where it can grow to. We've certainly, we've bid on a few things and we're outbid just because someone obviously wanted to get more aggressive on a deal than we did. So that goes back to my comments about us being willing to be patient and stay really disciplined in the way that we're looking at deals. As you know, we have plenty of Plenty of history and a very significant track record when it comes to doing deals in any part of the cycle. So I don't worry that we're not going to find things kind of as we progress here. But we're kind of, like I said, we're remaining patient. We're remaining disciplined and pretty comfortable with where we are with our current portfolio. And hopefully we'll be able to find some things here over the next couple of quarters that make sense for us.
spk13: Understood. Thanks for all the detail.
spk06: Thank you, Michael. The next question comes from Thomas Allen from Morgan Stanley. Please, Thomas, your line is now open.
spk11: Thanks. So just a couple more questions on the cost side. You talked about lower than expected real estate taxes. Can you just help us think about the trajectory of that line for the next few years and quarters?
spk12: Yeah, sure, Thomas. Thanks for the question. So yeah, Property taxes are coming in a little bit lighter than they did for the same property portfolio. If you go back to last year, the year before, they're down roughly 10%. So I think that's a good rule of thumb to use. Now within that line on our income statement is also insurance costs and insurance costs are up 15 to 20%. So there's a little bit of an offset there, but that's why that line has come down. And, you know, we expect that to continue this year. We're a little bit too early to know what that looks like next year, but obviously we've been pretty aggressive trying to get the assessments and the tax expenses lower for us going forward.
spk11: And, Akish, is that so our real estate and property taxes usually sounds like the larger, like two-thirds of that line, or is it, you know, what's the kind of weighting of the line historically?
spk12: Two-thirds or even a little bit more than that.
spk10: That's right.
spk11: And then I think I heard you right that payroll expenses are down 32%. I mean, any sense of if we're in a more normalized environment where we think we can keep payroll expenses down versus 2019 levels?
spk09: Yeah, I think it's really hard because you've got a confluence of both. Because again, not knowing kind of where staffing levels ultimately shake out and if and when kind of the actual wage rates flatten, it's really hard to put a number to that today.
spk08: Okay. That was worth a shot. Thank you.
spk06: Thank you, Thomas. Our next question comes from Tyler Bathory from Janie Montgomery Scott. Please, Tyler, go ahead.
spk10: Good afternoon. This is Jonathan. I'm for Tyler. Thanks for taking our questions. First one for you today, I wanted to follow up on the labor and margin discussion. Can you provide some additional color on the guest feedback you're hearing? And do you think you'll need to add labor amenities to meet guest needs in the near term, or are you still providing ample services in this current over-optimistic environment?
spk09: Well, I think it's something that in our portfolio, our management companies have been keenly attuned to and the asset management I'm working with on making sure that we're providing the right levels of service. I think you certainly saw higher levels of dissatisfaction across the industry with housekeeping services over the summer when hotels were still kind of sorting out what the right level of service was when you've got three or four people in a guest room in a resort type environment. So I think that's certainly a challenge. I think as the labor markets have opened up a little bit, I think the hotel has been successful in bringing back people into the more guest touch positions. So think about front desk, think about restaurant servers, things like that that have been a little easier to fill than the housekeeping and culinary positions.
spk10: Okay, very helpful. And then, can you remind us how much exposure the portfolio has to international travel and how much of an additional talent, if any, could the reopening of international travel into the U.S. be the portfolio?
spk09: Yeah, when we looked at it last, we were sub 10% for sure across the portfolio. As you know, we don't have a lot of significant major market gateway exposure. We do have in some of our hotels, some international crew business, and some of that is in place today, but we expect to grow as well. We also look forward to the reopening of in particular the European and South American markets, to Orlando, and where Hy-Vee Sea Grant Cyprus has been successful at times in capturing some of that business information strategies in place. Let's go after that business, particularly from the UK, as that market opens up.
spk10: Okay, great. Thank you for all the comments. That's all for me.
spk06: Thank you, Tyler. We currently have no further questions. I would like to hand over to Marcel Verbas, or any closing comments. Please, Marcel, go ahead.
spk12: Thanks. Thanks, everyone, for joining us today, and thanks for all the great questions. We look forward to talking to you and seeing many of you over the next few weeks at the various conferences, and look forward to talking to everyone again next quarter. Thank you.
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