Sunstone Hotel Investors Inc (SHO) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter conference call. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, Wednesday, August 2, 2017, at 9 a.m. Pacific Daylight Time. I will now turn the presentation over to Aaron Reyes, Vice President of Corporate Finance. Please go ahead.

Thank you, Valerie, and good morning, everyone. By now, you should have all received a copy of our second quarter earnings release and supplemental, which were made available 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 and 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; Marc Hoffman, Chief Operating Officer; and Robert Springer, Chief Investment 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. I'll begin the call today with an overview of our business, including a review of our second quarter operating results, and then share a few thoughts on our recent capital recycling activities, including the recently announced acquisition of Oceans Edge Hotel & Marina in Key West. Afterwards, Bryan will provide additional color on our balance sheet, capital markets transactions, cash position and earnings guidance.

Overall, our business is performing well and our hotel portfolio continues to deliver at or above our expectations. As I will discuss in greater detail in a moment, our repositioned hotels in Maui and Boston are doing exceptionally well, are contributing significantly to our 2017 portfolio growth and are materially exceeding our initial underwriting. Furthermore, we continue to advance our strategy of owning long-term relevant real estate as evidenced by our recent capital recycling initiatives while at the same time maintaining substantial liquidity investment capacity.

Taking a look at our recent performance. Our second quarter comparable portfolio RevPAR growth of 2.5% came in near the high end of our guidance range, driven by a 3.2% increase in average daily rates, offset by a 60 basis point decline in occupancy. This rate-driven growth, combined with a continued focus on asset management and cost containment across the organization, allowed us to generate adjusted EBITDA and adjusted FFO per diluted share that exceeded our expectations. Our second quarter comparable portfolio property-level EBITDA increased by 3.7% as a result of a 2.3% increase in comparable hotel revenue and a 50 basis point expansion in hotel EBITDA margins.

Our second quarter results were driven largely by the strong performance and continued ramp-up of our 2 recently repositioned hotels, the Boston Park Plaza and the Wailea Beach Resort. In the second quarter, these 2 hotels generated RevPAR growth of nearly 35% and collectively exceeded their second quarter EBITDA forecast by $1.3 million as the assets continue to reap the benefits of our capital investment and asset management initiatives and take share from competing properties.

The operating fundamentals of Boston Park Plaza once again exceeded our high expectations this quarter with RevPAR growth of 27%, driven by ADR growth of nearly 12% and an increase in occupancy of more than 1,100 basis points. This strong RevPAR performance is consistent with what we saw last quarter and brings year-to-date RevPAR growth to more than 26%. These impressive results allowed the hotel to grow RevPAR index by nearly 16 percentage points as the property continues to gain traction with both group and transient travelers. The success in the second quarter was the result of having a strong base of group and contract business that allowed us to compress the building and drive incremental transient rate.

In addition to positive trends on the rooms department, the hotel generated a 13% growth in food and beverage revenue (technical difficulty)

Ladies and gentlemen, please standby while we reconnect our operator -- our moderator. Please standby. Gentlemen, you may proceed.

Apologize to everybody, a little technical difficulty somewhere, but we shall continue. I was talking about the performance of our hotels both in Maui and Boston and that we have been growing RevPAR index pretty significantly in Wailea with a 16% -- 16 percentage point increase in RevPAR index at the property.

The success in the second quarter was the result of having a strong base of group and contract business -- excuse me, we're talking about Boston Park Plaza. The success of the second quarter was the result of having a strong base of group and contract business that allowed us to compress the building and drive incremental transient rate. In addition to the positive trends in this department, the hotel generated a 13% growth in food and beverage revenue during the quarter and benefited from a higher quality mix of business.

Turning to profitability. The hotel posted a 620 basis point improvement in margin this quarter and together with the strong first quarter brings the year-to-date margin expansion to 850 basis points. Our hotel operator, the hotel team at the Boston Park Plaza working with our asset managers, has successfully executed upon a number of post-repositioning cost initiatives. And several costs we encountered last year as part of the relaunch of the property have since been eliminated. Looking forward, the hotel is making great progress booking future business. And we are pleased with what we are seeing so far in 2018.

Now shifting gears out west to Hawaii, where quarterly results at Wailea Beach Resort also continued to exceed expectations. During the second quarter, the hotel generated RevPAR growth of nearly 52% and expanded margins by more than 1,400 basis points. While we are quite pleased with how the hotel is performing on its own, perhaps even more impressive is the progress the hotel has made in growing RevPAR index relative to the competitive set and closing the rate gap on the nearby Wailea properties.

In addition, positive guest feedback continues to gain momentum, and we continue to make great progress moving up in the TripAdvisor rankings in the market. While the hotel has gotten off to a great start post repositioning, we believe the renovated product and improved guest experience will drive additional gains through the remainder of 2017 and into '18. The property continues to focus on increasing appropriately placed corporate group business, along with growing premium and higher-rated wholesale business. We have also had success with our reimagined food and beverage concepts, which have been well received by guests and have contributed to improved out-of-room spends, so the hotel continues to attract high-quality groups.

Let's talk a bit about the remainder of the portfolio. As we discussed on the last call, we anticipated the second quarter results will be muted, given the calendar shift of the Easter holiday out of the first quarter in 2016 and into the second quarter of this year. Despite the unfavorable but anticipated shift, our second quarter performance overall met our expectations. Operations were more encouraging at our hotels in Los Angeles, San Diego, Orlando and Washington, D.C., which either met or exceeded our profitability expectations.

Alternatively, we experienced more challenged operating performance in certain markets, including San Francisco due to the widely known disruption at the convention center renovation; New Orleans, which suffered from a weaker-than-expected convention business; and finally, Houston, which continues to struggle, given the headwinds related to the oil and gas industry. Overall, 12 of our comparable 26 hotels delivered positive second quarter RevPAR growth while 13 of our 26 hotels met or exceeded their quarterly RevPAR forecast.

Despite a muted RevPAR growth environment in many of our markets, we were able to successfully manage costs across the portfolio and grew comparable portfolio EBITDA margins by 50 basis points in the quarter. Improvements in productivity from several time and motion studies that we previously put in place at a select number of our hotels has had favorable results in labor cost. And based on the success of these programs to date, we're in the process of reevaluating other hotels in the portfolio where we may be able to benefit further.

During the quarter, we also saw a 5% reduction in transient travel agent commission expense relative to the prior year as we are realizing the benefits from new contracts that the brands have implemented. While this reduction in guest acquisition cost is clearly a positive, our upside was partially offset by an 8% increase in group commissions as our 2 recently repositioned hotels are now attracting significantly higher volume and quality of group business. This is a good problem to have. In the second quarter, we also saw favorable trends in hotel G&A and food and beverage costs as well as continued declines in insurance expenses.

So let's talk in greater detail about recent group booking trends, which remain stable. Similar to what we saw earlier in the year, groups continue to not only show up in steady numbers during the second quarter, but they also increased their out-of-room spend. On average, our group attendance in the second quarter actualized at 84% of their respective room blocks, which exceeded our forecast of 83% and was closer to the high end of the historic second quarter range of 82% to 85%.

Group banquet and audiovisual revenue per group room increased nearly 4% in the second quarter, driven by a combination of growth at our repositioned resort in Wailea and more favorable mix of high contribution groups across the balance of the portfolio. In the quarter, group production for all current and future periods was healthy with our operators booking just under 350,000 group room nights, which was similar to the level produced last year. Inclusive of our second quarter production, our full year 2017 pace, excluding our 2 Houston hotels, increased by roughly 70 basis points to 3.7%.

Another notable trend in our group segment was a 73% increase in attrition and cancellation fees, which marks the fifth consecutive quarter of growth. What is important to note here is that while we have seen an increase in group cancellation fees, we have not seen an increase in the number of group room nights canceled. There's a very important distinction here. That is the increase in cancellation fees has not come from changing travel patterns rather, but our operating partners are being more diligent in enforcing cancellation terms and collecting the related fees. In particular, we want to recognize Marriott for their leadership on this front as they're being far more proactive in collecting group cancellation and attrition fees than was the case previously. We will continue to work with other operators to make similar changes going forward as this represents an opportunity to minimize lost profits in the future.

Now let's turn to our external growth initiatives. As we have discussed with you in the past, over the last 22 months, we have sold nearly $760 million of assets at a trailing EBITDA multiple of approximately 22x and indicated that we expected to recycle a portion of this capital into long-term relevant real estate. As recently announced, we have further executed upon our strategy with both the sale of another non-core asset, the Marriott Park City and the acquisition of Oceans Edge Hotel & Marina, which is consistent with our stated strategy of owning long-term relevant real estate.

Oceans Edge is a newly constructed, incredibly well-built oceanfront hotel and marina complex that opened just this past January. The property sits across 20 land and water acres on Stock Island in Key West, which we own on a fee-simple basis. The hotel has 175 waterfront rooms, including 86 suites, and all rooms have private balconies and ocean views. The rooms and amenities at Oceans Edge are of significantly higher quality than the majority of the existing Key West hotel supply. In addition, we also acquired 52 wet and dry boat slips and other amenities in the attached marina, which offers direct deep channel access to one of the most sought-after fishing destinations in the country. We look forward to working with our hotel operating partner on a variety of value-enhancing programming and asset management initiatives there. The newly constructed hotel is in great shape. Therefore, we do not anticipate a need to invest any material capital as the hotel ramps up. We are very pleased to add this asset to our portfolio.

In summary, our portfolio continues to deliver outsized earnings growth in the second quarter of 2017, aided by the contributions of our repositioned hotels and generally stronger pricing within our portfolio. In addition to the continued benefits of our 2 recently repositioned hotels, we now also expect to benefit from the earnings contribution of Oceans Edge as the hotel ramps up and stabilizes. Furthermore, our low-levered balance sheet and material investment capacity position us well to increase earnings through selective external growth and capital recycling.

With that, I will now turn the call over to Bryan for more details regarding our balance sheet as well as our updated 2017 earnings outlook. Bryan, please go ahead.

Thank you, John, and good morning, everyone. As John mentioned, we sold Marriott Park City in mid-June and acquired Oceans Edge subsequent to the end of the second quarter. In addition, we sold $79 million of equity under our existing at-the-market equity distribution program during the quarter. Inclusive of these transactions, we had nearly $420 million of unrestricted cash on hand on an adjusted basis and $1.2 billion of consolidated debt and preferred securities at the end of the quarter. While a portion of this cash will be used to complete capital investments in our portfolio and to distribute any remaining taxable income through our fourth quarter dividend, we estimate that we will retain between $250 million and $300 million of cash for future investment.

Our current in-place debt has a weighted average term to maturity of 5.6 years and a weighted average interest rate of 4.3%. Our variable rate debt as a percentage of total debt stands at 22% and 43% of our debt is unsecured. We now have 22 unencumbered hotels that collectively generated approximately $240 million of EBITDA over a trailing 12-month period and nearly 67% of our EBITDA is now unencumbered. In addition to cash on hand, we have an undrawn $400 million credit facility and no debt maturities before August 2019.

Now turning to the third quarter and updated full year 2017 guidance. A full reconciliation can be found on Page 28 of our supplemental as well as in our earnings release. For the third quarter, we expect comparable portfolio RevPAR to be between negative 0.5% and 1.5%. We expect third quarter adjusted EBITDA to be between $83 million and $86 million and adjusted FFO per diluted share to be between $0.29 and $0.31.

For the full year, we continue to expect comparable portfolio RevPAR to grow between 1.5% and 3.5%. This RevPAR guidance reflects the 26-hotel portfolio we own as of the end of the second quarter and excludes the recently acquired Oceans Edge, which was not opened in the prior year. In addition, we estimate that the Wailea Beach Resort will contribute 150 to 200 basis points of total portfolio growth as the hotel benefits from the recently completed repositioning. Inclusive of our recent transaction activity, we expect full year 2017 adjusted EBITDA to be between $325 million and $340 million and full year adjusted FFO per diluted share to be between $1.16 and $1.23.

We remain cautious with respect to the operating environment for the second half of the year and have kept our outlook for the rest of the year relatively unchanged from prior guidance. While we have increased the midpoint of our adjusted EBITDA and adjusted FFO guidance range to reflect our second quarter results and the impact of our recent transaction activity, our forecast does not assume meaningful acceleration of business travel for the remainder of the year. While this may prove to be conservative, we have yet to see the degree of improvement in operating fundamentals that would give us the conviction needed to increase our outlook at this time.

Now turning to dividends. Our Board of Directors has declared a $0.05 per share dividend for the third quarter. Consistent with our practice in prior years, we expect to pay a regular quarterly cash dividend of $0.05 per share 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. We will provide additional details on our forecasted full year dividends, including the catch-up dividend, as part of our next quarterly earnings call. In addition to our common dividends, our board has also approved the routine quarterly distributions for both outstanding series of our preferred securities.

With that, I'd like to now turn the call over to questions. Valerie, please go ahead.

(Operator Instructions) And we'll take our first question from the line of Anthony Powell of Barclays.

So there's some concern in the market about some general softening in lodging trends recently. As you look outside of your portfolio and to some of the industry data and some of the other earnings releases from your peers, are you seeing anything that makes you a bit more cautious on trends than you were maybe a quarter ago?

No, Anthony, really not. What we have found is most of our markets in aggregate have been stable. As we discussed in our prepared remarks regarding group, group is holding up just fine, continuing to show up in their historic pattern, continue to increase spend. A little bit of that is what we're seeing in Wailea. But I would say even extracting Wailea, I would define group trends as stable. When you look at transient, which I know has been some people's question, transient for us has been stable as well. I think what we've got a better handle on this year rather than last year is last year, we were caught a little bit flat-footed with groups not showing up as we expected. And therefore, our operators were forced to find additional occupancy through discounted channels. And I think we have a much better handle on this, this year as evidenced by when we talk about our group slip percentages, and thus far, we've actually exceeded our group slip percentage expectations, which leaves our operators in a very good position to maintain rate closer in. So while I know that this is a primary focus of the investment community, thus far, I'd describe the industry as very stable.

Got it. And going to acquisitions, how competitive was the process for Oceans Edge in general? Is the acquisition environment more or less competitive than it was 3 or 6 months ago? And how do you handicap the possibility of additional acquisitions this year?

A few things, Anthony. First off, we, over the past 9 months or so, had been incredibly active underwriting hotel investments. Robert Springer, by the way, his 40th birthday today, a shout-out to Robert. Robert and team, working with multiple departments here at Sunstone, have underwritten $1.5 billion of potential acquisitions. And what I mean underwriting, I mean, significant amount of time not only from the investment team but our design and construction team, engineering team, the entire executive team really going through the assets. And I will tell you, things are competitive and pricing expectations, I would say, are robust. They continue to be robust. With the Oceans Edge investment specifically, that came in through a relationship that Robert Springer had directly with somebody and that it was not a marketed deal. I think there were a few other REITs and private equity firms that were interested in the asset. But we believe that we took that asset, I don't know, on an off-market basis and we're very pleased with it.

(Operator Instructions) We'll take our next question from the line of Ryan Meliker of Canaccord Genuity.

I just had a couple of quick ones. 2 things. I guess first, you talked about the fact that you have material investment capacity. And then Bryan, I think you mentioned that you'll look to retain $250 million to $300 million of cash in the balance sheet. But in the second quarter, you obviously issued a significant amount of equity to help fund the Oceans Edge deal. Just wondering if we can reconcile all those comments. Where do you want to be? How much capacity do you really think you have today after the equity issuance that's been settled? What should we expect if you're going to be active on acquisitions, more equity issuance to help fund it?

Sure, Ryan. First of all, we issued on their ATM almost $80 million of capital in this past quarter with -- at share prices, we think, is accommodative to growth. And once we had much greater conviction that Oceans Edge would close and that we were working on the Park City sale, which obviously we're talking about significantly fewer dollars, we thought it was prudent to issue that equity to help fund Oceans Edge. And where that leaves us, Ryan, is leaves us, after subtracting out a rough estimate of cash that will go out the door in terms of a fourth quarter dividend in the first quarter of next year and after making adjustments for unrestricted cash in the system, so to speak, that leaves us with about $250 million to $300 million of investable cash. We think that's prudent, given where we are in the cycle. We also believe that, that has been very beneficial in adding credibility to us as a buyer. And we have seen that now in the numerous discussions we've had in potential acquisitions, that while we know that we incur modest, very short-term, nonrecurring dilution because of that to FFO, we believe that from a long-term basis, it's a prudent thing to have.

Okay, that makes sense. So we should expect you guys to try to maintain $250 million to $300 million in cash on the balance sheet. And if you find other deals, you'll likely to at least partly fund them with additional equity. Is that fair?

I think that's a fair comment. It really will depend on a number of factors. But directionally, Ryan, I think that, that makes sense.

Okay, good. That's helpful. And then second question, you mentioned this a little bit, but I don't know if you can give us any more clarity. It seems like obviously Wailea is ramping up nicely, Boston Park Plaza is ramping up nicely. As we move into 2018, do you expect to have continued material tailwinds from those 2 properties in addition to the ramp-up of Oceans Edge?

Ryan, we do. And I'll let Marc fill in a little bit of color. Obviously, we have not provided 2018 guidance. But as evidence of the continued ramp we see in Boston Park Plaza this year, remember, Wailea just finished its significant repositioning in the last couple of weeks of last December. But with that, I'll turn it over to Marc.

John, thank you. As it relates to Boston Park Plaza continued revenue management learnings really post the major renovation, we have been testing numerous revenue management strategies as you would expect when you make a complete shift in a building to a significantly higher quality product. We continue to learn from those that have worked and those that haven't. And we're going to take advantage of the best strategies and amplify them in '18 to result in solid transient growth. We do expect significant impact from group demand from the repositioned product. Prior to the repositioning in Boston, BPP was not a viable corporate group option. Now that hotel companies for the same corporate business as other large branded managed hotels in the market, in 2018, our group revenue pace is up double digits in Boston as customers respond positively to our uniquely positioned asset. It is a similar story in Wailea but in different segmentations. As John said, we really just finished at the end of '16. We have been testing numerous luxury transient revenue strategies in '17. Some have worked incredibly well, some haven't. And we will take the best of those and amplify them, resulting in solid transient continued ADR growth. And similar to Boston, Wailea was never able to attract higher and corporate and incentive group business. And in 2018, our group revenue booking pace is up strong double-digit growth and we are confident in our group position in 2018.

Great, that's helpful. And then just real quickly, one last question, you mentioned the fourth quarter dividend. Should we assume 100% of annual taxable income is going to be paid out? Or are there other metrics that we should be evaluating there?

We'll continue to focus on distributing 100% of -- or close to 100% of our taxable income when you declare the dividend in the fourth quarter of the year. You're not going to hit it exactly. But that's always our goal is to distribute 100% of our taxable income, which in any given year, can include pluses or minuses from [indiscernible] transactions. But we will -- I would expect the same approach as we did last year.

And we'll move to our next question from the line of Lukas Hartwich of Green Street Advisors.

So expenses are up a fair amount during the quarter. I'm just kind of curious what the key drivers were there.

Expenses were up. Actually, Lukas, I think that we held our expenses fairly, on a same-store basis, fairly well.

A portion of it could be the ramp-up in Wailea and Boston Park Plaza as Wailea was significantly offline last year. But on a cost per occupied room basis, those expenses have generally been in line, seeing certain areas, labor, have benefits increasing but then also savings on the insurance side and the energy side.

That's helpful. And then just kind of curious, I know it's a little nitpicky. But what drove the weakness in Baltimore this quarter?

Yes, Baltimore weakness was really primarily from group, short-term group pickup more than anything else.

Okay. And then lastly, Wailea RevPAR index, you kind of commented on it a little bit earlier. But I didn't hear an exact number, so I'm just kind of curious where RevPAR index is today for the Wailea asset. And can you remind us where you underwrote that to go to?

Yes. So we're using a couple different sets, the Kaanapali comparable set that we're using, which is the Sheraton, the Hyatt, the Andaz, Grand Wailea and the Westin. Before we started, we were 5 of 5. We're now currently running 3 of 5. Our year-to-date index is currently at about 88%, ADR is at 93%, occ is at 94%. And from an underwriting standpoint, I believe we underwrote somewhere close to the mid-90s, which we think we will get to.

And where was it when you bought the asset?

Lukas, let us get back to you on that.

Well, it's inexact but I believe in the low 80s.

We'll move to our next question from the line of Bill Crow of Raymond James.

John, a couple of questions here. Obviously, Boston and Wailea are appearing to be wildly successful. How does that change your perspective of doing another large renovation and given that we're even further into the cycle at this point?

The thing I like about our strategy of focusing on long-term relevant real estate is that can come in really different shapes and sizes and at different points of its product lifecycle. I think what the important takeaways for us is we can do extensive deep-dive renovations. And I think -- I don't think there's really much argument that those have proven to be very successful, more successful than we thought. That is not going to be our sole investment strategy or investment tactic. As evidenced by Oceans Edge, we're acquiring an asset that we believe has significant ramp-up, that is, from a capital perspective, largely done. From an asset management and reprogramming perspective, we have work to do there. And we're excited about those opportunities, and we're also excited about the market long term. So what I like about all of that is I believe that there are numerous tactics that we can employ. Over time, it's really not a one-size-fits-all to affect our strategy. Now with respect to would we do another large-scale repositioning? Sure. Would we contemplate doing 2 to 3 of them at the same time the way we did last time? I think that might have been a little aggressive, but we got it done. And for us, yes, is there a focus on where we are in the cycle? Of course, there is. But for projects like that, if we believe that over a long-term basis, we can change the earnings power of that asset, boy, there's part of me that even says taking one of those on at a downturn actually makes the most sense because that's when the construction costs will be lower, the labor trades will be more available. And we could actually position the asset or reposition the asset potentially through a downturn, and then coming out of an up cycle. So it really depends on the specific opportunity, Bill. But we're not crossing anything off our list.

John, any change in the origin of the guests in Hawaii after the weakening of the dollar? Have you picked up any additional international tourists?

Maui is really a coastal U.S. base. Off the top of my head, I think visitation from mainland U.S. is something in the 75%, 76% into Maui. Canada actually represents our largest inbound international visitation of roughly 12% onto the island. And unlike last year, which we saw some weakness in Canadian visitation due to the change in their dollar, we've actually seen strength this year in Canadian visitation. So overall, we feel good about overall visitation. I will tell you that airline capacity has increased into Maui and we're very pleased with that.

Okay, great. One final housekeeping note for Bryan. As we think about next year, and I know you're not giving guidance, but given the acquisitions, dispositions activity, how do we think about the quarterly -- the seasonality? Any commentary relative to how this year is playing out?

No, I mean Bill, we'll obviously provide a lot more color as we get closer into next year. I think what we do provide in the supplemental is we will go -- we do go back on a pro forma basis and provide that quarterly information. I think we have through the second half of last year in the current supplemental. So what our seasonality, absent any additional acquisitions, dispositions, what our seasonality looks like this year should be generally representative of what the following year would look like. But we'll give you additional color as we get closer.

We'll take our next question from the line of Smedes Rose of Citi.

I wanted to ask you just on San Francisco. Do you feel like the -- is there a sense of the second quarter as maybe the worst is behind you? Or maybe how does that -- how would you expect that market to play out over the balance of the year, that property, not necessarily the market?

Yes, Smedes, Marc. As far as the second quarter goes, we could have done a better job in booking into the hotel leading into the quarter. Our short-term group over the last 6 months had been weak. And we've been working very diligently to correct those issues in the future. Q3 looks to be a good, solid quarter. Q4 comes back to being somewhat slightly weaker. But I suspect we'll work our way through the remainder of this year.

Yes, Smedes, it's John. We do expect that the second quarter, we believe, will be one of the worst quarters, if not the worst quarter in San Francisco for our hotel.

Okay. And then I just wanted to ask you on the Boston Park Plaza. Are you -- satisfied at this point running it as an independent property? Are you still -- would you still consider potentially adding it to one of the -- adding one of the brands to that hotel?

Smedes, we always have that optionality. There's been considerable interest, particularly now that Marc and the design and construction team and asset management teams, I think, have done a phenomenal job in repositioning that asset. Given the quality of that asset, there's been considerable interest in the brands. Thus far, we have not been able to prove to ourselves that adding a brand at these significant costs would be beneficial. We believe that we'd get some incremental level of RevPAR but at the added cost of fairly significant fees and a long-term encumbrance. So at this point, while we retain that optionality, we have decided not to pursue that strategy.

Okay. And then just one final, and I don't know if you know this, but the -- for the Key West property, do you have a sense of how long that took to bring to market from kind of the initial planning stages to opening?

Yes, it's Robert. The developer of the project was working on it for multiple years. As you can -- at least 3 -- as you can -- you might know or appreciate, Key West is an incredibly difficult market to add supply to, given Rate of Growth Ordinances that are in effect for the safety of the island for a number of reasons, environmental protection and so forth. So there was -- there has been a couple of new developments. I know Key West this year is -- some hotels are struggling a little bit frankly because of hotels like Oceans Edge opening and other supply that was taken offline and dramatically repositioned and brought back online. So there has been some supply changes, I guess, is the best way to say it. But the particular avenue that the developer, in the case of Oceans Edge, used to add Keys to the market, has since been closed and isn't a path that can be followed again to try to add ROGO units to the market. It's continuing to underscore how difficult it is to add real, true, new supply there.

We'll move to our next question from the line of Jeff Donnelly of Wells Fargo.

I just had one question on San Francisco. Can you talk with us about just how the RevPAR index of the Hyatt performed in Q2 versus maybe the CBD market? I'm just curious if you'd been outperforming during the weekdays, when we had more maybe group-oriented hotels lagging to the Moscone -- or if maybe your hotel was hit a little harder than you expected.

You know what, Jeff, let's grab that. It's a little bit granular. And while we have it here, just give us a few minutes. And what we'll do is we'll come back and answer that more specifically if you have another question.

No, I don't. I can follow up with you offline.

Okay, great. Or we'll come back and just provide the information in a moment.

We'll move to our next question from the line of Shaun Kelley of Bank of America.

Maybe just a quick one on the margins, John. I think in the prepared remarks, you mentioned that you have rolled out some time and motion studies for some of the core portfolio assets and that the results were favorable. Any -- could you give us any view on either quantification of the size of the opportunity to roll that out further or how much tailwind that might be adding to the performance that we saw in the quarter?

No, we prefer not to quantify that at this point. I think on the margin, it will be beneficial over time. We've done that at a handful of hotels and believe that those are sustainable savings without any reduction in guest satisfaction.

We rolled those out throughout last year. So as we get through this year and into the fourth quarter, we will have a full year-over-year comp. Some hotels start in the first quarter, some not until later. So we'll continue to see some of those benefits throughout this year. We continue to look at rolling out the program or learnings from the program that now some of our smaller hotels, we focused on all of the larger group hotels. So as we roll those out to the smaller hotels, the benefit obviously will not be as material as we've seen in some of the larger 5,000-, 6,000-, 7,000-room hotels. But those will go into next year. But as far as the year-over-year comp this year, as we get to the fourth quarter, we start to anniversary those savings.

Okay. And then I guess just big picture, is it enough to offset what you're seeing sort of elsewhere in the cost environment? I think if we were to try and just unpack the 2 renovated or repositioned assets and the impact on margins, the core portfolio would probably be closer to flat or maybe slightly down. So I mean, is that a good guide for sort of the environment that we're in right now, inclusive of those savings? I mean, any -- guide is probably the wrong word on that, but just directionally trying to kind of get a sense of your operational leverage point.

Where we're absolutely benefiting and from a margin standpoint from those savings, and especially as you look through the supplemental, you can see the hotels with the lower RevPAR or even negative growth but then being able to maintain margins as the big-box hotels. Those are absolutely benefiting from this, this year. As we go forward, the RevPAR growth or the revenue growth that you're going to need to maintain margins will increase from where we are this year.

We'll move to our next question from the line of Thomas Allen of Morgan Stanley.

I'm sorry if you said this earlier, I may have missed it. But what are you expecting for the holiday shifts in terms of a drag on 3Q RevPAR? And if it's possible, could you split it up between kind of the July 4 impact, and then also -- then the Jewish holiday impact?

Yes, in 2017, the Jewish holiday will shift to September from October as everyone knows. And based on that history over Jewish holidays, we estimate a shift of approximately 10,000 group room nights and some compression of approximately $2 million and 280 basis points. We don't think July 4 had too much of an impact. There was some strength, but July 4 has a tendency to work its way out without too much of an impact year-to-year.

Did you guys say what July RevPAR growth was? And if not, what was it?

Excuse me for one second.

So for July, we finished up 1.7% for the portfolio.

Perfect, helpful. And then just my follow-up question, so Comic-Con was in San Diego last week. There were some articles about a lot of alternative accommodation supply increasing there. Did you see any kind of -- did you feel like there was any kind of difference in trend than what you had been historically?

No, we felt good about Comic-Con. We had a good week.

We'll move to our next question from the line of Michael Bellisario of Baird.

I was hoping that you can maybe give us your thought process on how you underwrote Key West, what you thought about, maybe how you handicapped some of the longer-term risks in the market, and then ultimately how you guys kind of got your 2018 EBITDA estimate for us.

Yes, sure. It's Robert. So I think the easiest way to sum up our view on the Oceans Edge investment is acquiring what you can really consider a Middle Keys resort that's located 5 miles from Duval Street. So I know there's a lot of question around the location of or has been question around the location of the hotel relative to the heart of downtown in Duval Street. But if you look at the overall Key West and the larger Keys market, there's several resorts located up in the Middle Keys, for example, in Tranquility Bay, Hawks Cay, Cheeca Lodge, for example, that perform very, very well. Because one thing about Key West is while it's a very popular destination, it is probably in the heart of Key West is probably not as quite family-friendly, similar to, say, Bourbon Street in New Orleans. So the idea of having an oceanfront destination resort, 50% suites that's 5 miles from Duval Street that allows people to experience many of the different aspects of the Keys as well as Key West central, we think, will result in a very successful execution in that asset. And in terms of specifically in 2018, obviously it will be the second -- the year -- the hotel's second year of operations. So we'll still be ramping up to where we ultimately see it stabilizing in performance and penetration.

And then specifically though on the risk maybe in the market and how you think about the customer mix there over the long term?

Yes. And obviously, the market -- and I think I mentioned -- answering a question a couple of minutes ago, I mentioned there has been some weakness in the overall market in Key West this year, probably most directly related to supply changes that have happened as a multitude of hotels have been renovated, repositioned or taken offline almost completely or completely, and then brought back online. And then some new supply has entered the market, including most notably the asset that we just acquired. So overall, the Keys has demonstrated over the years a very strong resilience as a very popular destination. It is effectively the way to get a Caribbean vacation without a passport and without getting on an airplane. And if you've ever been to Key West and get up early in the morning and go for a run, as you run around Key West and you look at the variety of license plates from the broader East Coast of the United States, you'd be amazed at how strong a drive-to market it is.

And Michael, it's John. Just a little bit on some of the inherent risk in the Key West market. Obviously, hurricane would be one of those and a top one. Keep in mind that this is an incredibly well-constructed building. The site was raised up to protect from surge. The buildings actually sit well above property line. And the building is poured in place, concrete that is incredibly durable. And we felt very good about that. And also just consider that we also manage some of those risks from a portfolio basis. If this was 50% of our portfolio, I think we would have come to a different answer. But at a 4% allocation of our total asset value, we believe that those are risks worth taking and we've mitigated them properly.

We'll move to our next question from the line of Chris Woronka of Deutsche Bank.

Appreciate the data point about the increased focus on collecting the cancel and attrition fees. Wanted to ask kind of along those lines, I know that Marriott and Hilton recently changed the cancellation policies to, I think, 48 hours out. Is that something that you guys can underwrite in terms of whether there's going to be -- whether that ultimately helps your rate or occ? Is it something you even look at?

We do believe it's helpful. We have been working with our operating partners to continue to extend cancellation provisions and collection of those cancellation attrition on the group side. Nothing to quantify right now, but we are -- even at the risk of short-term disruption and conflicts between the brands and some OTAs, we believe that is a very worthwhile endeavor to continue cancellation and attrition and to lower OTA cost.

And Jeff, I just want to get back to you on your question about San Francisco. I mean, the real impact on index really is that we fell short in group occ more than anything else, and then slightly in midweek transient.

That was for San Francisco.

For San Francisco, excuse me.

For a prior question. Chris, did you have anything else?

Yes, just one other one for me. I know -- I guess if we start back with Wailea and now Oceans Edge, the 2, obviously those are both resorts. And I think some of your peers have -- a lot of what they've been buying is resort material as well. Is that -- I mean, should we view that as a strong preference among not only you guys, but maybe the broader REIT community? And is that more of a play on leisure continuing to kind of outperform business transient in the urban market?

No, Chris, I wouldn't read that into that. Of the $1.5 billion of potential acquisitions we've underwritten, the range has been resort to big group box to very strong urban and has ranged anywhere from redevelopment to brand-new out-of-the-box. So I would not read into that, that we have a high focus on resort right now.

We'll move to our next question from the line of Rich Hightower of Evercore ISI.

John, I wanted to follow up on the -- again on the cancellation and attrition fee comment. Can you just tell us maybe how the brand's posture in that specific area has changed, if at all, today and just kind of compare it to history so that we have an idea of what sort of the incremental benefit there might be? And then is there a way for you guys to quantify that in terms of the EBITDA contribution potentially from that chain?

So Rich, it became very apparent to us in the budget season last year that Marriott, in particular, was becoming much more focused on collecting group cancellation and attrition fees. And you have to remember that we are in the hospitality business and there are strong relationships between hotel teams and our national travel folks or what have you in that nobody wants to leave disappointed and people want to continue to get that next piece of business. The problem with that is there is a fragmented -- somewhat of a fragmented ownership group. So just so they cancel at our hotel doesn't mean that, that should be ignored, and then given the benefit of booking somewhere else. So I think Marriott has done a very good job at that. And what's funny is we are constantly looking for potential cracks or signs of growth. And when we see our cancellation and attrition fees increase as much as they did in this past quarter, up over 70%, obviously that's something you'd say, "Oh, my goodness, cancellation fees are really increasing." But when you really take a look at the number of rooms that have canceled and where those rooms are coming from, it's like I said in our prepared remarks, it's not about changes in travel patterns, it's changes in the way that our operators are reacting to cancellation and attrition. And we look at this as a very positive thing. How do we quantify that? I will refrain from trying to. It's not an enormous number of dollars. I think year-over-year, we're talking about, I don't know, $0.5 million to $1 million year-over-year. But it's beneficial.

Okay. No, the color there is helpful, so appreciate that. My second and final question, just thinking about the transactions market and a lot of the headlines recently with respect to the Chinese buyer pool, and sort of what's happening there, I mean, have you noticed a change in the level of competition, pricing or just any sort of incremental changes from Sunstone's perspective with respect to that specifically?

Yes, honestly don't have any current data points in terms of has there been a change there. Believe it or not, Marriott Park City did not garner an enormous amount of Asian interest in terms of bidders. Obviously, when we sell an asset, that's probably our best lens into where those buyers might come out. We just didn't. That's the most recent disposition we've had and clearly isn't the profile that would attract that type of buyer.

We'll move to our next question from the line of Floris van Dijkum of Boenning.

I wanted to see if you could make some comments on the Oceans Edge stabilized returns and maybe changes in market prices including urban and resort hotels.

Yes, in terms of the first question, I believe what we indicated in the release was we expect the hotel to stabilize in the 8% to 9% yield range as it ramps up from its current performance and its first year of operation to ultimately a stabilized performance, which we see as a modest discount to the overall RevPAR index of the high end set in the heart of Key West. And then I'm sorry, what was the second part of your question?

Sorry. And the second part of the question is as you're looking -- particularly as we look across the country and we see more construction in urban markets, are you seeing any changes in pricing for urban hotels versus resort hotels?

Nothing that I can speak to. As you've kind of stated the question specifically, do we see urban cap rates changing? I'm not kind of changing what you said a little bit. I don't see any specific movement in urban cap rates versus resort cap rates. I would say that certain markets around the country that are well documented to have meaningful supply additions either recently or ongoing, such as New York, I would expect that they definitely experienced an impact on values. But it's really impossible to quantify based on the trades that we have in front of us since several trades that happened, ? la the Waldorf or DoubleTree Times Square, were related to larger redevelopments.

We'll take our next question from the line of Bryan Maher of FBR Capital Markets.

Just a quick question. Having done some work on the Florida Keys marinas a few years back, those have some pretty high value to those slips. And I'm curious if when you were underwriting the property, if you broke out what you found to be or you thought to be the value of the slips versus the value of the hotel? And if so, could you share that with us?

Sure. So just cutting to the chase, we ascribed about $80,000 -- $75,000 to $80,000 per key in value to the wet and dry slips, which we think have fairly significant value. So it reduces the overall allocated cost for the hotel to, call it, $920,000, $925,000 a key.

And who's going to be operating the marina? Will it be the same as the hotel manager or somebody else?

Yes, the marina is operated -- the hotel is operated under a management agreement with Singh Hospitality. And affiliates thereof will also work on the marina.

It appears that there are no further questions at this time. Mr. John Arabia, I'd like to turn the conference back to you for any additional or closing remarks.

Thanks, everybody, for your continued interest. We are all around headquarters today if you'd like any follow-up comments. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.