Sunstone Hotel Investors Inc (SHO) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors fourth quarter conference call.

(Operator Instructions)

I would like to remind everyone that this conference is being recorded today, February 22, 2017 at 9 AM Pacific time. You I will now turn the presentation over to Mr. Aaron Reyes, Vice President of Corporate Finance. Please go ahead.

Thank you, Priscilla, and good morning, everyone. By now you should have all received a copy of our fourth quarter earnings release and supplemental which were released yesterday. If you do not yet have a copy, you can access them on our website.

Before we begin I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks an other filings with the SEC which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDA, adjusted FFO and hotel adjusted EBITDA margins.

We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. With us on the call today are John Arabia, President and Chief Executive Officer; Bryan Giglia, Chief Financial Officer; and Marc Hoffman, Chief Operating Officer. After our remarks, we will be available to answer your questions. With that, I would like to turn the call over to John. Please go ahead.

Good morning, everyone, and thank you for joining us today. In some quarterly calls there's little to discuss other than a routine update of operating fundamentals and quarterly earnings. Given recent events, this isn't a typical quarter as fourth quarter operating fundamentals and earnings materially exceeded our expectations. And the recent increase in our share price and corresponding reduction in our cost of capital have increased our appetite to acquire high quality hotel real estate after being a net seller of hotels for nearly two years.

Furthermore, the recent sale of another hotel at a low yield and various other financing transactions leave us with significant optionality and external growth capacity that represents unrecognized earnings potential for our shareholders. I'm sure one of the biggest questions in many investor minds is whether or not there's been improvement in hotel operating fundamentals since the presidential election. The simple answer to this question is this.

It is too early to tell whether the recent uptick in various elements of our business is sustainable and there remains a wider-than-normal range of potential outcomes for 2017 RevPAR and EBITDA, including potentially negative outcomes. That said, we are more optimistic about our 2017 prospects now than we were three months ago. So let's discuss some of these trends, both positive and negative, beginning with our fourth quarter operating results. We were pleasantly surprised by a stronger-than-anticipated revenue growth and profitability during the fourth quarter of 2016.

Our quarterly operating results, which include total portfolio RevPAR growth of 1.6%, exceeded our expectations and surpassed the midpoint of our guidance range by nearly 260 basis points. This stronger-than-anticipated top line growth, combined with lower-than-expected costs related to energy, property tax and corporate overhead, resulted in fourth quarter adjusted EBITDA and adjusted FFO per diluted share materially exceeding the top end of our guidance range. Overall, the operating environment in the fourth quarter was more constructive than we had expected when we spoke in early November, although admittedly our expectations were low coming off of three quarters of deteriorating RevPAR growth, largely resulting from softer-than-anticipated transient pricing.

During the fourth quarter, our total portfolio average daily rate increased 160 basis points while occupancy remained flat at 77.8%, resulting in portfolio RevPAR growth of 1.6%. In a reversal from the second and third quarters, transient demand was stronger than group demand and we had a bit more success pushing both transient and group rates. Group revenues from the quarter came in lower by 2.8% on a 5.3% decline in room nights relative to prior year while average group rates increased approximately 2%.

Nearly 300 basis points of our decline in group demand can be attributed to our two Houston hotels which experienced a significant slowdown in one of their recurring training groups which produced approximately 10,000 fewer low rated group room nights than they did a year ago in the fourth quarter. As discussed on the call last quarter, our fourth quarter guidance assumed that actualized group rooms, as a percentage of their group blocks, would be lower than the historic average. However, the fourth quarter actual group slip percentage of nearly 84% came within our historic norm of 83% to 85% and exceeded our internal forecast of 79% which, on our last call, we said could prove to be conservative.

Additionally, banquet and audio visual spend per group room was up nearly 4% in the quarter. These two data points related to group attendance and group spend suggests the group business remains healthy. Transient and contract demand was stronger than expected and backfilled for the declining group room nights during the quarter.

Transient and contract demand increased 2.7% while rates increased by 1.2%. Transient demand was healthy in several markets in the quarter including Washington DC, Times Square, Baltimore and Orlando. Turning to margins -- during the fourth quarter comparable hotel EBITDA margins contracted by 80 basis points as sub 2% RevPAR growth was not enough to maintain margins despite property level cost controls, operational efficiencies and lower energy costs and real estate taxes.

Normalizing for the ground rent increase at the Hilton San Diego Bayfront, margins for the quarter would have decreased by approximately 30 basis points. On a full year basis, hotel EBITDA margins contracted by 30 basis points and adjusting for the Bayfront ground rent increase, full year 2016 margins would have been up 20 basis points. For the full year, RevPAR growth was an anemic 70 basis points for our entire portfolio.

Adjusting for approximately $12 million of rooms revenue displacement at our Boston Park Plaza and Wailea Beach Resort, our RevPAR growth would have been approximately 2.3%. While group room nights decelerated in the fourth quarter, we still achieved a record 1.37 million group room nights for the year, the highest number of group room nights on record for our portfolio. As for 2017, we expect our portfolio to generate RevPAR growth of 50 to 350 basis points, coming from ADR growth in 18 of our 27 hotels and robust ADR and occupancy growth in Wailea and Boston as they continue to ramp up.

At the end of January our 2017 group pace for the entire portfolio was roughly flat. However, without the two Houston hotels, which in the previous year included significant group reservations that did not materialize, our portfolio pace is up almost [3%]. While one month does not make a trend, we were encouraged with our January short-term group bookings as in the month for the quarter group bookings increased by over 25%.

Furthermore, at the end of January approximately 75% of our forecasted group room nights for the full year have been identified. This figure is 230 basis points ahead of where we stood at the same time last year as we have worked with our operators to group up at several of our hotels. Overall, we expect our hotels in San Francisco, New York City, Portland, Houston and Chicago to underperform in the portfolio while our hotels in Los Angeles and the rest of Southern California, Wailea, Washington DC and Boston are expected to provide outsize growth.

More importantly, we're pleased with the initial results from our two recently completed repositionings. Boston Park Plaza continues to ramp up during the fourth quarter. Group revenues grew 12% in the quarter on a 2% increase in group room nights and a 10% growth in group ADR. The growth in group ADR is encouraging as we sought to generate more production in the higher-rated corporate segments through the repositioning effort.

Additionally, 2017 pace remains very strong at the hotel, up 31% from a year ago as we look to achieve the most group rooms at the highest group ADR ever attained at this hotel. We're also pleased with the efforts of our on-property sales team as they produced 23% more group room nights in 2016 than they did in 2015 and produced more than double the group room nights than was the case five years ago. As those of you who have seen this beautiful hotel, we have fundamentally changed this asset and improved its long-term earnings power.

Even more exciting is our post renovation performance at the Wailea Beach Resort. Following the substantial completion of the renovation in late December, the hotel not only looks incredible but, more importantly, has begun to ramp up nicely. Average rate at the property in December was up $100 or nearly 32% from last year. Building off a strong finish in 2016, the Wailea Beach Resort continues to grow rate in January and, relative to its competitive set, is closing the rate gap faster than we anticipated.

January RevPAR increased by 25% over the prior year. The increase was made up of a $90 increase in transient rate and 3% increase in room nights. 2017 group pace is up approximately 15% coming primarily from increases in ADR. Similar to the trends witnessed at Boston Park Plaza, the remixing of the group clientele is a slower process than is the case with transient demand but over time we expect it to result in a more profitable customer that has a higher food and beverage contribution.

Together, these two hotels are expected to deliver outsized RevPAR growth in 2017 and produce combined EBITDA that is $16 million greater than they did in 2016, excluding the impact of the Marriott cash flow guarantee. Now let's shift gears and talk a little about our current investment environment and our capital allocation strategy. As you know, we have said repeatedly since early 2015 that we were more likely than not to be a net seller of assets.

Including the recently announced sale of the Fairmont Newport Beach for $125 million, we have sold approximately $735 million of assets over the past 18 months at a weighted average trailing EBITDA multiple of over 22 times. Given our significant cash balance and access to multiple forms of reasonably priced capital, our appetite for acquisitions of high quality real estate has increased. We continue to look for and underwrite hotel investments, although we were not alone, and the level of competition for acquisitions has increased as well.

While acquisitions for Sunstone have become more in focus, it is important to note that we are likely to continue to sell hotels that no longer meet our investment criteria or hotels that we can you achieve a price well in excess of our internal valuation. While we can not promise anything, we hope that 2017 is active both buying and selling hotels, resulting in a higher quality portfolio, earnings growth stemming from our significant liquidity position while at the same time maintaining significant financial strength and optionality.

In summary, our portfolio is well positioned to deliver outsized relative earnings growth in 2017, particularly with the anticipated contributions of our repositioned Boston and Wailea hotels and our low levered balance sheet, material investment capacity and access to reasonably priced capital position us well to increase earnings through disciplined external growth. With that, let me turn the call over to Bryan for more details on various capital transaction as well as additional details regarding our 2017 earnings guidance. Bryan, please go ahead.

Thank you, John, and good morning, everyone. I would like to start by reviewing the financing transactions that we have executed since the beginning of the fourth quarter. In December we completed a $240 million private placement of senior notes which have a weighted average interest rate of 4.74% and staggered nine and 11 year maturities.

The notes funded in January of this year and we utilized the proceeds, along with cash on-hand, to fund the early repayment of two mortgage loans totaling $242 million and which together had an average interest rate of 5.58%. We expect to generate over $2 million in annual run rate interest savings from these transactions. In the fourth quarter we also issued approximately 3.6 million shares of our common stock for approximately $55 million of gross proceeds under our at -the-market common equity offering program.

Including the impact of the above transactions and taking into consideration the net proceeds received from the sale of the Fairmont Newport Beach and the payment of our common and preferred of dividends, our pro forma unrestricted cash balance as of the fourth quarter was approximately $440 million. As of the end of the year, we had approximately $1.2 billion of consolidated debt and preferred securities outstanding on a pro forma basis. Following the completion of our recent financings, we have extended the weighted average term to maturity of our in place debt from four years to six years and decreased our weighted average interest rate to 4.17%.

Our variable rate debt as a percentage of total pro forma debt stands at 22% and 43% of our debt is now unsecured. We have 22 unencumbered hotels that collectively generated $240 million of EBITDA in 2016 and nearly 70% of our total 2016 property level EBITDA is now unencumbered. In addition to our cash on hand, we have an undrawn $400 million credit facility and no debt maturities before August 2019.

Our balance sheet is the strongest it has ever been and we retain considerable flexibility to take advantage of opportunities as they present themselves. Now turning to first quarter and full year 2017 guidance, a full reconciliation can be found on page 22 of our supplemental as well as in our earnings release. For the first quarter, we expect total portfolio RevPAR to increase between 2.5% and 4.5%.

We expect first quarter adjusted EBITDA to be between $61 million and $64 million and adjusted FFO per diluted share to be between $0.19 and $0.21. For the full year, we expect total portfolio RevPAR to grow between 0.5% and 3.5%. This guidance reflects all 27 of our hotels and we currently estimate that the Wailea Beach Resort will contribute 150 to 200 basis points of the total portfolio growth as the hotel benefits from the recently completed renovation.

Our full year [2007] adjusted EBITDA guidance ranges from $306 million to $330 million and our full year adjusted FFO per diluted share ranges from $1.09 to $1.19. Similar to the approach we took in late 2016, which proved to be somewhat conservative, our 2017 guidance assumes a group slippage percentage slightly below that of the historic average. Furthermore, our RevPAR does not assume a meaningful acceleration in business travel.

Now turning to dividends, our Board of Directors has declared a $0.05 per common share dividend for the first quarter. Consistent with our practice in prior years, we expect to continue to pay a regular quarterly cash dividend of $0.05 per share of common stock throughout 2017. To the extent that the regular quarterly common dividend for 2017 does not satisfy our annual distribution requirements, we would expect to pay a catch-up dividend in early 2018 that would generally be equal to our remaining taxable income.

In addition to the common dividend, our Board has also approved the you routine quarterly distributions on both outstanding preferred securities. With that, I'd now like to open the call to questions. Priscilla, please go ahead.

(Operator Instructions)

We'll take our first question from Smedes Rose with Citi. Your line is open.

Hi. Good morning. I wanted to ask you just two quick questions. You gave some guidance around your expectations in Hawaii. And I think you said $16 million of incremental EBITDA from both the Boston and Hawaii assets.

But how do you just think about the ramp at that hotel? RevPAR was very strong but margin was relatively weak which I think is pretty typical. But how long do you think it would take to get fully sort of stabilized there from now?

Sure. Good morning, Smedes. Generally a property like that -- and we're looking at 18 to 24 months. And so we believe, as we said in the prepared remarks, that the transient will come quicker, group will take a little bit longer, but what we have seen there initially gives us hope that we will actually ramp a little faster than that. I'll turn it over to Marc Hoffman.

Smedes, good morning. We are very pleased on the transient side and the group side. I think given the nature of this complete repositioning, similar to Boston, we are investing in heavy training with the manager, lots of things around the customer really to set the goal.

Our trip advisor scores have just gone up incredible. The resort now is the number one ranked resort within all of Marriott and previous Starwood results among Marriott. So keeping the positioning high will help drive long-term rate and profitability.

Thanks. And then, John, just as you look at your portfolio now, and you guys have talked about maybe looking at some acquisitions and pursuing, I assume, some more disposition as well, what sort of percent of your portfolio now do you sort of view as core and what percent would you, all other things being equal, would you like to be able to turn over?

Very good question, Smedes. I would say as we pursue a strategy investing in long-term relevant real estate, when we look at our portfolio the top portion of our portfolio where most of our asset value resides, it's more than half of our portfolio. But when you take a look at actual value, it's much more significant than that. Many of you have heard me say before that just our investment, not current market value, but just our investment in our last three acquisitions of Boston, Hyatt Regency and Wailea are investments of $1.1 billion.

When I take a look at, for example, the bottom third of our portfolio, that bottom third of our portfolio makes up -- roughly by our math -- call it 10% to 15% of total asset value. So we are very heavily weighted. And you can do this in our supplemental and taking a look at where real asset value is, but I think over -- as we've been doing, over time I think what you'll see us do is shift out of many of those assets at the bottom portion of our portfolio. Although keep in mind that the total value there isn't as significant as our top assets.

Okay. That's helpful. Thank you.

Thanks, Smedes.

Thank you. We'll l go next to Shaun Kelley with Bank of America. Your line is open.

Hi. Good morning, guys. John, I just wanted to see if I could dig in a little bit deeper to sort of your core trend, trying to exclude some of the moving pieces about what's going on with Wailea and Boston to some extent. When we kind of back into at least high level numbers around that, it seems to imply probably about a core EBITDA decline year-on-year of maybe somewhere in the low single digits -- between 3% and 4%.

I'm curious if, A, that sort of jives with the math or numbers that you guys are looking at. And then, B, it seems like kind of with what we're seeing with some of the peers this morning, they're probably on similar RevPAR growth doing -- like seeing a slightly lower decline than that. And I'm wondering if there are any specific issues to Sunstone, be it property tax or anything else or just general conservatism, to kind of bridge a little bit of that delta.

Good morning, Shaun. It's Bryan. I'll take the first part of that. Looking at our guidance range, and last year we used a 300 basis point range, we felt that with the uncertainty that's out there now that wider-than-average range -- I think majority of the group uses a 200 basis point range -- that it just was warranted, again, based on the uncertainty.

And as we said in the prepared remarks, based on what we saw in the fourth quarter we really haven't increased our expectations based on that one quarter of stronger than anticipated growth. It takes longer for that to work its way through the system to be able to really have confidence that would be something that would continue. And so if we see that trend continue into Q1, then the potential of the wider range and the potential of there being some conservatism in those numbers is quite possible.

Again, I think we need to see some time for it to work out to either tighten that range or change the outlook. Again, not enough time has passed. As far as one-time expenses -- going through the larger items, real estate taxes -- our expectations is low single digit, 3% to 5% growth in that this year -- no real big one-time hits. Salaries and wages and benefits will be up as you would expect, comparable to others.

Heat, light and power -- something that we've -- and energy expense -- something that we've had some success with, some investment over the years, we're forecasting up. They've proven be down in prior years. So it will depend but if we have a good year with no surprises or negative surprises on the real estate tax and insurance front, the margin performance could be slightly better.

Great. Okay. Thanks for that, Bryan. And then my second question is sort of on the Wailea ramp. I'm just sort of curious on the overall Hawaii backdrop at this point heading into 2017, we know it's a low supply market. Kind of what's your -- and I believe a competitor this morning or a peer this morning was also calling out some strength for Maui. Just what's your high level macro view towards Hawaii when we sort of weigh a strong dollar and specifically how much that might mean to Maui versus no supply and sort of a broader -- probably a pretty strong -- target market coming from California?

Thanks, Shaun. I'll speak to the operations optics. I'll let John talk to the dollar. Obviously no supply -- great air lift pricing.

The continued low fuel cost for airlines has resulted in really all-time low pricing of flights from the predominant markets which is West Coast, including Dallas and Chicago. The volume of business also in the larger -- on the outer islands is very strong. We have very positive signs and believe that will continue. And group coming into Wailea, when you look at demand 360 and travel click for the year, is also very strong.

It's John here. When you take a look at Maui, you have to remember that Maui is a little different than visitation that goes to Oahu. And that is while Oahu has a very meaningful inbound travel from Asia, the island of Maui, partially because of the length of the airstrip and also just because of some of the amenities, are different than Waikiki or Oahu. The visitation from the United States represents over 75% of total visitation, significantly more than you see in Oahu and some of the other islands.

In fact, the largest inbound international visitation is actually from Canada. And so as Marc said, the island of Maui has actually been very strong. We expect it to continue to be strong. We have seen significant increase in air lift, particularly from San Francisco Airport.

And we feel very good about not only the island itself, the way we see it now, but also our ability to successfully execute our business plan which was, as many of you have heard me say, buy the worst house on the best street and fix the house. And just close the rate gap between where the hotel was performing and where the other hotels that sit immediately adjacent to us are performing and have been for some time. So thus far, as Marc said, we're encouraged by our recent results that are actually better than our expectations. So a lot of work by Marc and the entire team on that asset. And thus far we're enthusiastic.

Thank you very much.

Thank you. And we'll go next to Chris Woronka with Deutsche Bank. Your line is open.

Hi. Good morning, guys. Bryan, I guess first a housekeeping question for you. Thanks for giving us the impact of -- estimated impact of Wailea. But on the first quarter can you share that same difference in terms of RevPAR and also maybe the margin difference for the whole year?

Yes. For Q1 -- one second while I pull that. The Wailea impact on the portfolio is roughly 80 bps for RevPAR.

Okay.

Full year we gave you that range. On the margins it's around -- you know what? Let me -- if you have another question, let me look at one other thing and then I'll get back to you on that.

Sure. I guess maybe a question for John. John, we've heard you guys are probably the third hotel REIT call this morning where we're hearing about increased appetite for acquisitions. And while stock buyback authorizations are in place, they're not really being carried out.

So I guess the question is does it necessarily mean a change in view on the he cycle or does this have more to do with cost of capital? And the second part of that would just be are you willing to do something on a disruptive -- kind of like you did in Boston and Wailea now or is that different versus kind of when you started those two?

Yes, Chris, good morning. A few questions there. I think it's a very good question about whether or not in this cycle we are seeing maybe an extended cycle. And I think that tends to be the consensus viewed now and the biggest change since the presidential election. Clearly share price increase is refocusing people's attention on acquisition. Whereas as we talked many times in the past, it was difficult to fund an external growth strategy considering most of the hotel REITs were trading at fairly notable discounts to net asset value.

If you remember back in the early part of 2016, several of us were trading at what most of us thought were 20%-plus discounts to NAV. With a significant increase in share price, I think it's shifted people's focus, as I said earlier, more to acquisitions. However, I think we all need to be need to be mindful, or at least we are mindful, that no matter how you look at it, even if you believe there are extra innings in this cycle, we're still later cycle. And that has to be taken into your calculus when buying long-term real estate.

So as I said in the prepared remarks, we will endeavor to acquire -- Robert Springer, our Chief Investment Officer, and team and the rest of us -- are actively underwriting acquisitions. But as I also said, it is a competitive market. We have seen our REIT brethren show up at many of the hotels we've been looking at. So it will be interesting to see how this all plays out over the next year, particularly with the backdrop of volatility in both operating fundamentals and our cost of capital.

Hi, Chris. The impact on margins on the full year from Wailea would range from about 40 to 70 bps.

Okay. That's great. Very good. Thanks, guys.

Thank you. We'll go next to Lukas Hartwich with Green Street Advisors. Your line is open.

Thanks. Good morning, guys.

Hi, Lukas.

I was just hoping you could touch on why you tapped the ATM, given the Company's sizable cash balance?

Sure -- very good question. We access the equity markets in December following an increase in our share price. Despite already having a pretty notable cash balance as we believed then, as we believe now, that we are likely to acquire high quality real estate in the medium to near term. Having that cash on hand and having access to that significant buying power we believe actually makes us a far more credible buyer within this marketplace because we're able to do things like waive financing contingencies, which buyers today are taking a fairly hard line approach against.

And I'd also suggest to you that in December we were unsure of whether or not the Fairmont Newport Beach would actually close for various reasons. So clearly, Lucas, we are sitting on a much higher cash balance than would normally be the case. However, given certain things that we're considering, we thought it was prudent and we'll endeavor to recognize the earnings potential of that cash for the benefit of our shareholders.

That's helpful. And kind of along the same lines, how does the Company think about the right cash balance? Do you guys have an explicit target or is it more organic than that?

It's probably a little bit more art than science, Lukas. And the good thing is I think that would be a far greater focus, having as specific cash balance if we were more highly levered and if we had more significant near term debt maturities. The simple fact of the matter is, we don't have a debt maturity until August 19.

We can defend any one of our notes coming due, which isn't for a long time. We're producing free cash flow. We always have the ability, should we get for some reason the operating fundamentals deteriorate, we could make modest modification to CapEx.

So we have a lot of break points. So I would say, particularly given all the covenant room in our credit facility, our relationship with our bank group, which is sterling, we can actually go down to a pretty low cash balance to operate the Company without taking on, I'd say, any material risk.

That's really helpful. And then lastly, it looks like you rebranded your Hyatt in Chicago. Can you talk a little more about that? And did you receive any incentive?

Chris, it's Marc Hoffman. Thanks. The rebranding of Hyatt Chicago was really an internal issue among Hyatt. As you may know, they created Hyatt centric as a way to differentiate between Hyatt and Hyatt Regency.

And they basically did away with the Hyatt brand. So core urban Hyatts, unique locations, became Hyatt Centrics and the remaining Hyatts because Hyatt Regencies. Hyatt did pay for all of the cost related to that, i.e. signage, uniform changes, amenities, that kind of stuff. And we continue to be pleased with that hotel the way it works.

Great. Thank you.

Thank you. And we'll take our next question from Thomas Allen with Morgan Stanley. Your line is open.

Hi. You gave some positive commentary just around Wailea RevPAR growth -- I think it was up 25% in January and then group production in January. Can you just talk about what overall RevPAR growth was in January? Thanks.

Let's see. Wailea -- let's start this way. In January our portfolio -- total portfolio RevPAR was up 8.1%. Without Wailea it was 6.9%. Keep in mind, though, that we had significant benefit from inauguration. When you take a look at -- if you backed out Wailea and our DC Renaissance, Baltimore and Tysons, our portfolio was up about 2.5%. So in January Wailea was --

Wailea was up about 25% in January. The DC -- as John said because of the inauguration -- DC was ranging -- that region was up from low teens to DC run was over 50% up for the month.

Okay. So X DC and Wailea, January RevPAR is up 2.5%. Fourth quarter RevPAR was up 1.6% and significantly outperformed your expectations. Why not more optimistic about 2017 RevPAR growth?

Thomas, as I said, it's too early. We have seen an uptick. We've seen an uptick clearly in certain group elements of our business.

We've seen an uptick in our ability to move transient pricing. But keep in mind, we're talking about a couple of months of data points, maybe two. And given how volatile this business is and what we continue to believe a volatile world, we're going to take a wait-and-see approach in terms of making any upward changes in our guidance.

Helpful. Thank you.

Thank you.

Thank you. We'll take our next question from Ryan Meliker with Canaccord Genuity. Your line is open.

Hi. Good morning, guys. Good morning out there.

Hi, Ryan.

I wanted to piggyback off I think it was you Lukas' question earlier regarding the ATM issuance in December. I understand that you weren't sure about the Fairmont closing then. But even so, you still had from your press release about $380 million in cash on-hand. Adjusting for the equity issuance, you're still talking over $320 million in cash in undrawn credit facility.

So I'm just trying to get a better understanding of what prompted you guys to pull the trigger on the ATM. Was it just that you thought the pricing was attractive? Or was there a deal that you were really close to getting that for one reason or another didn't materialize as opposed to necessarily something in the near to medium terms?

I thought the cost of that equity was reasonable but we continue to work on various initiatives. If we knew we had absolutely no chance of deploying that, we wouldn't have raised it. We're not in the cash business. We're in the hotel business.

But we are endeavoring to put that to work. We thought the cost of equity was reasonable. And as our typical business practice, we don't really talk about much until it occurs.

Which I understand. So I guess to ask another way, is there something -- is there a specific transaction that capital was raised for?

To be determined.

(laughter) Okay. Fair enough. That's helpful. And then --

Sorry about that, Ryan.

(laughter) I'm just trying to get a better understanding of how you're thinking about raising equity at prices. My fear is it puts a little bit of a ceiling on the stock if equity's being raised without a particular use of proceeds. So hopefully we'll get some light shed on that use of proceeds in the near term. I guess the only other thing I wanted to touch upon was excluding Wailea -- just trying to get a better sense of how you think your portfolio is positioned relative to the broader market.

I understand that you've got some conservative guidance assumptions and I think a lot of that makes sense and it's prudent. Are you expecting, excluding the Wailea impact, for your portfolio to come above, below, in line with the major market performance this year? Major market performance being up in the air based on what you've talked about with economic growth and uncertainty in the administration, et cetera.

Ryan, from what we've heard from the two competitors or two fellow REITs that have announced, I would say that excluding Wailea, we're generally in line. When you take a look a at our RevPAR guidance of 50 basis points to 350 basis points, and just quick math, Bryan had talked about 150 to 200 basis points of Wailea. Just take off 150 for simplicity. We're at minus 1 to positive 2, using a slightly wider range. I think that's fairly comparable to at least the headline numbers that I heard from our friends at DiamondRock and Host. Although I will tell you I've not dug into their information but it seems like the headline numbers are pretty close.

That makes sense. I only ask because they are close but you guys seem to have materially lower supply growth across your portfolio than those other guys do.

That I can't really comment on their supply numbers. Keep in mind that we have taken a fairly dim view, for example, at San Francisco. I think there's some chatter expectations out there that RevPAR could be flat in San Francisco. That's not something that we believe is the case, just given the changing dynamics at Moscone. So there's -- Ryan, my point of bringing that up is there's a lot of things that bubble up into those numbers.

Sure.

We're comfortable with where we are.

And then I guess just one last quick one with regards to kind of the outlook for 2017. Not to put you on the spot here, John, but I think over the past three years you guys have exceeded quarterly EBITDA guidance for now 12 straight quarters or 11 of the past 12 quarters. And I say exceeded, I mean exceeded the high end of the range. Is there anything in terms of how you're guiding in 2017 that is different from how you've guided in the past?

Not really. Bryan had mentioned we're -- let me just give you a couple of data points. We are assuming a slightly wider-than-normal slip rate on our groups. We are assuming that the recent uptick in January and let's say December -- we're taking a wait-and-see approach on that. But through our typical rigorous budgeting process -- where people from senior management, our asset managers attend every budget meeting, challenge, work directly, help change grouping strategies, pricing strategies, what have you -- that's how we come to these numbers. So I would say that no real change in how we've done it over the past several years.

Okay. That's it from me. Thanks, John.

Thanks, Ryan.

Thank you. And we'll go next to Michael Bellisario from Baird. Your lines is open.

Thanks. Good morning, guys.

Hi, Michael.

Just following up on your comment on San Francisco. Has your you view of the market for 2017 changed at all? What are you seeing at your property in terms of pace? And then also what are the risks that you might see that might prevent you from hitting your budgeted number at the property?

So let me talk first about what our expectations are for -- I'm sorry. Hold on one second, Michael. Let me get the pace number first.

So our most recent pace is down mid single digits at the hotel. And that has fallen off fairly meaningfully as time has gone on. I would anticipate the following in San Francisco.

As there are something to the extent of kind of 20, 25 fewer compression days coming out of Moscone that the big box hotels will be more competitive in trying to backfill with either in-house group or with transient. And what our expectation is and what we've seen at other markets where something like this has transpired is the secondary impact is you generally have a decline in transient rate. Now we believe that the blow to us should be softer because we do have in-house group somewhat to fall back on, albeit the pace is slower. Those that have high transient strategies I think might incur more difficulties than we do but we shall see.

Thank you. We'll go next to Bill Crow with Raymond James. Your line is open.

Good morning, guys.

Hi, Bill.

I always like your commentary on M&A. And I think it's probably timely given the activism that we've seen from some institutional shareholders as well as yesterday's hostile bid. I wonder if that changes your perspective for M&A within the sector as you think forward, whether it's a year or three years or five years.

The specific transaction announced yesterday does little to change our view on M&A. It is something that I think, for the industry, would be beneficial. I do believe with the right combination it could add shareholder value. I am surprised in the roughly 20 years I've been in this business that it has not occurred with the exception of potentially if you want to count the apple REIT transactions.

Obviously social issues are an impediment but, given the current landscape, I am hopeful that over the next couple of years we could see a bit of M&A. That's a gut feel. I don't have anything to point to. But I do believe that perhaps the industry is at a time where M&A could make more sense.

How do you think about it as a CEO when you see the activism really ramp up over the last few years? Does that change the dynamics of how you think about running the Company?

For us, no. Our Board and management team are highly aligned on this. And, Bill, as you know, we are incredibly shareholder friendly. We believe very strongly that a best -- our best defense is a great offense. And while that might sound cliche, we do not have the weapons of mass entrenchment.

We have a very shareholder friendly corporate governance. We have very good relationships with our shareholders. At the end of the day, we know who runs this Company and why we run this Company. It's for shareholders.

So I feel very comfortable with that stance and if we mess up, well, shame on us. And if somebody has a better idea, let them come in. But, no, we feel very comfortable with our relationship with our shareholders.

Okay. And I was thinking almost the opposite of that, which is some of the activists might look at you as being someone they could turn to as a partner in shaking things up a little bit.

You know what? We've looked at things in the past. We'll continue to look at opportunities, whether they be property, portfolio or Company. We have the capacity and a lot of optionality. Sometimes those larger transactions -- I think people overlook some of the material costs related to those transactions, which would be changes in property taxes, transaction taxes, deal costs.

Those things add up. But in any case, it would be something that we would look at with the right opportunity. But it has to fit into our portfolio strategy, our balance sheet strategy. We're not just going to grow to get bigger. That doesn't make any sense.

Very good. Thanks for the comments. Appreciate it.

Thanks, Bill.

Thank you. We'll go next to Anthony Powell with Barclays. Your line is open.

Hi. Good morning, guys.

Hi, Anthony.

Hi. Just one quick one from me just on leverage and acquisitions. You obviously have a very low net debt to EBITDA ratio. What leverage are you comfortable getting to given the current volatility in the cycle?

It really depends on the cycle. We think of our leverage really more like an accordion. Later on in the cycle we would expect that leverage declines. Where we are now, a little bit higher than where we are you now, a little bit lower -- that, to us, is all in the safe zone.

It takes away the defensive cost of a potential downturn. It gives us optionality, should there be a downturn. I would fully anticipate that if there were or when there will be a downturn, that leverage metric will pick up as we take advantage of opportunities.

So it's -- could we at one point see our leverage go up to five times, 4.5 times? Sure. I think at the right stage, that's completely manageable. So, again, not to dodge the question, but it's -- we look at it as something that will change over time and as a result of industry dynamics.

All right. That's it from me. Thank you.

Thanks, Anthony.

Thank you. And we'll go now to Bryan Maher with FBR & Company.

Thank you. And just to change topics a little bit -- John, you were pretty vocal last year about how managers were dealing with pricing on a nightly basis and potentially negatively impacting RevPAR. Do you have any thoughts -- updated thoughts on that? Have they gotten better? What are you seeing now?

We're moving in the right direction. There have been endeavors by several of our operators to slowly but surely move to either cancellation fees in certain markets and try to implement strategies that are pushing more room nights to the lower cost avenues of sourcing that demand. And so this is not something that's going to change overnight. But we have been pleased, although we wish it would happen overnight, we've been pleased that this has been a great topic of discussion at some of the larger branded operators.

Thanks.

Thanks, Bryan.

And I'm showing we have no further questions at this time. I'd like to turn the call back to John Arabia for any closing remarks today.

Thank you, everybody, for the interest in our Company. We are around this afternoon if you have any follow-up questions. We greatly appreciate it and have a great day.

This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.