Sunstone Hotel Investors Inc (SHO) 2017 Q3 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the Sunstone Hotel Investor Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

I would like to remind everyone that today's conference is being recorded today, Tuesday, October 31, 2017, at 9 a.m. Pacific Daylight Time.

I would now like to turn the presentation to Aaron Reyes, Vice President of Corporate Finance. Please go ahead, sir.

Thank you, Jake, and good morning, everyone. By now, you should have all received a copy of our third 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 happy Halloween. Today, I'll provide a review of our third quarter operating results, including the impact of Hurricanes Harvey and Irma on our portfolio. Afterwards, Bryan will review various balance sheet highlights, provide additional color on our third quarter financial results and discuss our updated earnings guidance, which includes the impact of the recent storms.

As you are likely aware by now, there were various moving pieces in our third quarter that, in some instances, made it more challenging to assess the underlying performance of our business. As we look across our third quarter results, adjusting for the unanticipated hurricane impact, our portfolio performed better than we had expected, and our overall outlook for the business remains largely consistent with our view when we spoke in early August. Our 2 repositioned hotels once again delivered outsized growth, while the remainder of our portfolio, in aggregate, continued to meet or exceed our previous expectations.

Our third quarter comparable portfolio RevPAR growth of 2% came in above the high end of our guidance range driven by a 2.4% increase in average daily rates, offset by a 40 basis point decline in occupancy. This RevPAR growth, combined with stronger-than-anticipated ancillary revenue and a continued focus on cost containment across the organization, resulted in adjusted EBITDA and adjusted FFO per diluted share that exceeded our expectations.

Our third quarter comparable portfolio property-level EBITDA increased by 1.7% as a result of a 3.3% increase in comparable hotel revenue and a 50 basis point contraction in hotel EBITDA margins.

Our third quarter results were driven largely by strong performance and continued ramp-up at our 2 recently repositioned hotels, Boston Park Plaza and Wailea Beach Resort. For the second quarter in a row, these 2 hotels posted combined RevPAR growth in excess of 30% and continued to materially exceed our initial underwriting. We continue to be pleased with the operations of Boston Park Plaza, which performed well, even relative to our high expectations this quarter with RevPAR growth of 10% driven by rate growth of 7% and an increase in occupancy of approximately 300 basis points.

In addition to the strong performance in the rooms department, the hotel generated an 18% increase in food and beverage revenue during the quarter and benefited from a higher quality mix of business.

Turning to profitability. The hotel posted an 80 basis point improvement in margins this quarter, and together with a strong first half, brings the year-to-date margin expansion to 500 basis points. Looking forward, the hotel is making great progress booking future business, and we are pleased with what we're seeing so far for 2018.

Now turning to Hawaii where quarterly results at Wailea Beach Resort also continued to exceed expectations. During the quarter, the hotel generated RevPAR growth of nearly 90% and expanded margin by nearly 2,200 basis points as the hotel was lapping one of the final corners of renovation work. While we're quite pleased with how the hotel is performing, perhaps even more impressive is the progress that the hotel has made in growing ADR index 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 incremental gains through the important 2017 holiday season and is positioned well as we look ahead into 2018.

Now let's discuss the impact of Hurricanes Harvey and Irma on our portfolio. As I mentioned at the beginning of the call, we experienced short-term hurricane-related disruption at our hotels in Texas and Florida as well as isolated ripple effects at certain other hotels across the portfolio due to weather-related travel disruption.

Our 2 Houston hotels remained open and operational during Hurricane Harvey and sustained modest damage in a number of rooms and should be back in service by the end of November. Even with a number of rooms out of service, both Houston hotels outperformed our low expectations for the third quarter due to incremental business that was generated as a result of the storm and the subsequent recovery efforts. In the fourth quarter, both hotels continued to witness elevated levels of demand related to the storm.

The Renaissance Orlando remained open and operational during Hurricane Irma with no material damaged incurred at the property. Our Orlando hotel witnessed increased transient demand during the storm, which partially offset lost group business and related food and beverage profits related to weather disruption.

The biggest impact on our portfolio was the Oceans Edge Hotel & Marina in Key West, Florida, which was closed on September 7 following a mandatory evacuation order in connection with Hurricane Irma. The hotel sustained only minimal physical damage and partially reopened on September 27. All of the rooms were not back online until October 19, and we expect transient demand to return slowly as the season kicks into high gear. Bryan will discuss the financial impact of the hotel's closure on the fourth quarter and full year guidance in his remarks.

Now looking at the rest of the portfolio, we had anticipated that the third quarter would be the most challenging of the year in terms of year-over-year growth given the calendar shifts of the Jewish holidays into September. However, taking into consideration the lost profits and short-term cleanup costs of the hurricanes, our quarterly results exceeded our expectations.

Operations were more encouraging in our hotels in Portland, San Francisco, New York, Houston and Washington, D.C., which either met or exceeded our RevPAR expectations, albeit some of them low. Alternatively, we experienced more challenging operating performance in certain markets, including Baltimore, Chicago, Westchester and LAX. Overall, 15 of our 26 hotels met or exceeded their quarterly RevPAR forecast.

Food and beverage growth also provided a boost. Our portfolio generated a 4.1% increase in food and beverage sales in the quarter with a healthy 9.7% increase in banquet and audio visual contribution per group room relative to the prior year. Similarly, we continued to see favorable trends in the enforcement and collection of cancellation and attrition fees across the portfolio, which came in higher in the third quarter and now marks the sixth straight quarter of positive performance. As I mentioned on our last call, this increase in revenue is generally not the result of changing travel patterns but the result of our operating partners being more diligent in enforcing cancellation and attrition terms and collecting the related fees. In fact, our year-to-date total group room nights canceled is the lowest it's been since 2011.

While we are pleased with our stronger top line performance this quarter, we also saw an uptick in operating expenses, which led to a 50 basis points decrease in comparable portfolio EBITDA margins. In particular, wage and benefit costs were higher as marginal gains and productivity were more than offset by increases in average wage rates.

So let's talk in greater detail about recent group booking trends, which generally remained stable. Our in the year for the year group pickup was strong as our portfolio picked up 18,000 more group rooms in the third quarter of 2017 as compared to the same period in the prior year. We did see group attendance per meeting dip in the third quarter. However, the increased slippage was largely due to flight cancellation and other weather-related travel disruptions resulting from the hurricanes. On average, our group attendance in the third quarter actualized at 83% of their respective room blocks, which was a 50 basis point decrease from the prior quarter last year and below the historic third quarter average of 84% to 86%.

While attendance slipped, we did see further increases in our group out-of-room spend driven by a combination of growth in our repositioned resort in Wailea and a more favorable mix of higher contribution groups across the balance of our portfolio. In the quarter, group production for all current and future periods moderated in the quarter as our operators booked approximately 280,000 group room nights.

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

Before I turn the call over to Bryan, I would like to take a moment to recognize and personally thank all of the team members that worked incredibly hard during the hurricanes and made personal sacrifices to ensure the safety and well-being of our guests and team members in incredibly difficult circumstances. In particular, I want to extend our gratitude to Troy and Jason, our area general manager and general manager of our 2 Houston hotels and their entire team for not only protecting our guests and hotel associates but also providing much-needed shelter to area residents and also acting quickly to minimize the damage to the 2 hotels.

I'd also like to thank Bob, our GM at the Renaissance Orlando, and his entire team. Not only did the hotel make it through the hurricane with very limited damage due to the team's incredible preparation, but they also helped to stage provisions and emergency equipment for our hotel in Key West despite the fact that Marriott doesn't manage our Key West hotel. That is despite that all they had on their own plate, Bob and the team at the Renaissance Orlando took time to help others in need.

And finally, I'd like to thank Mike, Bob, Simon, [Lubos], Chris and the entire team at our Oceans Edge hotel. These gentlemen worked for days under incredibly difficult conditions, including no utilities, to the repair the hotel and get it reopened as soon as humanly possible.

I think it's very easy to be cynical these days with all the petty name-calling in Washington and the win-at-all-cost approach that some seem to employ of late. However, it is these types of selfless actions displayed by these teams that remind us that we're all in this together, and there are good and caring people in the world. Again, I'd like to extend our significant thanks to all involved.

With that, I'll now turn the call over to Bryan. Bryan, please go ahead.

Thank you, John, and good morning, everyone. I'll start with a quick recap of the balance sheet and then provide additional color on some of the financial activity that occurred in the third quarter. And finally, I'll finish with an update on our revised outlook for the year.

Turning to the balance sheet. We ended the third quarter with nearly $467 million of unrestricted cash on hand and $1.2 billion of consolidated debt and preferred securities. While a portion of this cash will be used to complete capital investments and to fund our anticipated catch-up dividend, which I will discuss shortly, 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 5.4 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 hotels that collectively generated approximately $247 million of EBITDA over the trailing 12-month period, and nearly 70% 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.

During the third quarter, there were several onetime noncash expenses and credits. While these are all items that are routinely excluded from adjusted EBITDA and adjusted FFO, we wanted to provide some additional information on each.

There were 2 noncash charges recorded during the quarter. First, we wrote down our 2 Houston assets from a net book value of approximately $72 million to a new value of approximately $38 million, resulting in a $34.4 million noncash expense during the quarter. Over the last few years and despite a recent uptick in oil prices, both hotels have experienced a decline in operations, primarily impacted by new supply and a weak oil and gas industry. Because these hotels are not consistent with our strategy of owning long-term relevant real estate, we reduced our expected investment horizon for both hotels, which, combined with the declining operations, led us to record an impairment charge this quarter. Since we published the financial performance for each of these hotels in our quarterly supplemental, the adjustment to our book value should be relatively in line with expected values.

The other expense recorded this quarter was a noncash prior year's interest charge of approximately $4.5 million to reclassify the ground lease at the LAX Courtyard from an operating lease to a capital lease. After reviewing the lease, we concluded that, at inception, it should have been recorded as a capital lease because of the embedded bargain purchase option we have in 2037 to acquire the fee simple interest. Going forward, we will present this capital lease in the same way that we present the Hyatt Chicago's capital building lease, where we include an adjustment for the noncash interest to recognize the actual cash ground lease payment made to the lessor. These adjustments will continue to be made in adjusted EBITDA and adjusted FFO.

There were also several noncash credits recorded during the period ended September 30. First, we recorded approximately $13.6 million of noncash income tax benefit to release a previously taken valuation allowance related to net operating losses at our taxable REIT subsidiary. Prior to the release of this allowance, there was a level of uncertainty as to whether or not we would be able to realize the benefit of the net operating losses prior to their expiration. After evaluating the historic performance of our operating leases and their future projections, we now have a high level of confidence that we will realize the remaining value of the NOLs.

The other noncash credit recorded during the quarter was a $7 million deferred gain related to a potential liability from a prior asset sale that is now considered remote, and the remainder of the gain was realized. As all these items, both expenses and credits are noncash and have been added back to adjusted EBITDA and adjusted FFO as applicable.

Now turning to the fourth quarter and updated full year 2017 guidance. A full reconciliation can be found on Page 30 of our supplemental as well as in our earnings release. We have adjusted our previous full year guidance to reflect the expected fourth quarter operations impact of the hurricane at Oceans Edge. While the hotel is now fully operational, we expect a slow ramp-up in the fourth quarter as the hotel returns to pre-storm levels.

For the fourth quarter, we expect comparable portfolio RevPAR to grow between 0.5% and 2.5%. This RevPAR guidance reflects the 26-hotel comparable portfolio and continues to exclude Oceans Edge, which was not opened in the prior year. We expect fourth quarter adjusted EBITDA to be between $72 million and $76 million and adjusted FFO per diluted share to be between $0.24 and $0.26.

For the full year, we expect comparable portfolio RevPAR to grow between 2.25% and 3.25%. We expect full year 2007 (sic) [2017] adjusted EBITDA to be between $331 million and $335 million and full year adjusted FFO per diluted share to be between $1.18 and $1.20. This revised full year guidance reflects our updated outlook for Oceans Edge following Hurricane Irma and the storm's lingering impact but does not include any estimates for business interruption insurance proceeds that we are seeking to collect under the existing policy. We remain cautious with respect to the operating environment for the remainder of the year. And excluding the storm-related adjustments, we 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 range to reflect our third quarter results, our forecast does not assume meaningful acceleration in business travel for the remainder of the year.

Now turning to dividends. Consistent with our practice from prior years, we are -- we expect to declare a catch-up dividend in the fourth quarter that will generally be equal to our remaining undistributed taxable income. Based on our current outlook, we expect our fourth quarter distribution requirement to be between $0.50 and $0.60 per share. Combined with the dividends paid for the first 3 quarters, the midpoint of the dividend guidance range would equate to a dividend yield of approximately 4.3%. Our Board of Directors will approve the final amount of the catch-up dividend, and it will be declared later this quarter. Separate from the common dividend, our board has already approved routine quarterly distributions on both outstanding series of our preferred securities.

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

(Operator Instructions) And we will go first to Anthony Powell with Barclays.

When you acquired Oceans Edge, you forecasted '18 EBITDA of between $11.5 million and $13.5 million. How does Hurricane Irma changed that forecast next year? And do you think it takes longer to get to your stabilized yield of 8% to 9%?

Anthony, it's Bryan. With Oceans Edge, we did adjust the fourth quarter EBITDA to reflect the disruption and an anticipated slower ramp-up to get the hotel back to its pre-storm condition. Depending on the rate at which that ramp-up happens in the fourth quarter will determine if the operations next year will be a little behind where we were or catch back up. We'll need a little bit more time to determine what that rate's going to be.

Remember, following the storm, the city of Key West did make a statement saying for visitors to stay away until the end of October. That was changed a little after the storm, but the ramp-up has been slow up to that point. We're entering the high season now, so the next few weeks will be very important to understand the velocity of that ramp. And during this time, there will be a business interruption claim that we are working on and we'll be filing. The amount of that and the timing, again, it's a little too early to tell. But we'll have an update on next call.

And then San Francisco, you've done a good job of booking in-house groups. How do you plan to alter that strategy next year in '19 as the citywide calendar improves in the market?

Yes. Anthony, I think you mean 2018. You said next year, right? Or do you also want me to talk about 2019 where the city has huge impact?

I guess both, yes. How do you plan, I guess, change the booking strategy given the improvement of citywides in both years, really?

Yes. So currently, citywide room nights for San Francisco on the books for next year is 740,000 rooms. That's a 19% increase to '17, but it's still 20% behind '16. The number of citywide room nights that are associated were higher impact conventions that affect us. Citywides of 5,000 or more rooms on a specific day are also up 22%. We are in the right place where we want to be internally in the hotel. Currently for 2018 and '19, we're very focused on the placement between weekday and weekend. And in 2019, the city has currently 1.15 million room nights on the books, which is the peak of any year ever in the history of the city, so we feel that between that and compression. The one thing to remember about our hotel is -- and the city, is we do better with transient rate than groups. So if anything, in 2019, we will be very, very picky about rate and placement to maximize RevPAR.

Next, we'll hear from Lukas Hartwich with Green Street Advisors.

John, I was hoping you could maybe touch on -- the economy seems to be improving, and yet we're just not seeing an improvement in hotel demand growth. So I'm just curious what do you think is driving that? Why aren't we seeing an improvement in hotels?

That's a great question, Lukas. I wish I had a great answer. As we've talked about in the past, we're constantly looking for overall levels of details in -- within our own business to ascertain whether or not there's any change in the current environment of just muddling along as I think most hotels are, by and large. There are various elements that would support the fact that we are in later stages of the cycle and acting very much in the later stage of the cycle in terms of there's those 2 quarters in a row where group production has moderated, not significantly, but that's something we're looking at.

On the other hand, there are areas such as short-term bookings in the quarter for the quarter that have been relatively strong. And food and beverage spend or audio visual-banquet spend has actually been pretty robust. It is unfortunately still too early to tell whether the hopes of reacceleration in our underlying business are there or not. We remain conservative in our view to operating fundamentals. I hope it happens, but we've also prepared should that not be the case.

That's helpful. And then just last quick one. In Houston, RevPAR was down quite a bit, but EBITDA was up quite a bit as well. So just kind of curious what the disconnect was there.

Lukas, it's Bryan. There was a cancellation charge for one of the contract pieces of business that was in that hotel.

If you remember, our hotel -- our 2 Houston hotels actually held up -- over the past several quarters have held up fairly well relative to the market, and we had had a sizable piece of contract business in the hotel. That business went away from us, and there were certain cancellation provisions that accrued to us. So those are actually fairly related.

And now we'll hear from Jeff Donnelly with Wells Fargo.

Maybe just the first question, John. I think Marriott has been looking at transitioning, I guess, what you'd call the occupancy hurdle for award travel reimbursement to something more of a phased hurdle. I'm just curious how much does that influence, in your opinion, pricing behavior in the market? And do you see that as beneficial to the extent it's implemented to rate integrity, to RevPAR, hotel owner profitability, all the above? I'm just curious how you're thinking about it.

Jeff, I don't think any final determinations have been made. Those are discussions that are ongoing, and we have been participating in some of those conversations. Far too early to tell. However, we do applaud Marriott and others for having these conversations and making changes in terms of cancellation attrition, about longer cancellation windows and making certain changes to -- on our guest programs that remove some of the unintended negative consequences. But far too early to tell, Jeff.

Okay. And to switch gears maybe just back to San Francisco. I'm just curious, how are you guys thinking about San Francisco's ramp as we move through 2018? We've kind of gotten past the worst of Moscone. I know you're not necessarily right in the heart of the convention center district, but certainly you benefit maybe from some of the overflow. I'm just curious, do you kind of think the back half of the year is materially stronger than the first half? How are you guys kind of planning that out?

Yes. On the margin, we've got a little bit more constructive on San Francisco for 2018. It seems that there have been incremental bookings into the city. I wouldn't say necessarily we're out of the woods yet when it comes to performance in San Francisco. We have noticed that there's been an uptick in enthusiasm towards the city from the investment community, and I think, directionally, that is correct. As Marc said earlier, the real win is going to come in 2019 where the city is having a banner year, and there should be enormous amounts of compression. But like I said and like Marc had said earlier, we do feel incrementally positive about the city moving into '18.

And just one last one. I'm not sure if you have them handy, but just concerning some of the bigger renovation projects you've undertaken, can you talk a little bit about what the RevPAR index of those assets look like sort of pre renovation versus post renovation? I know there's maybe been a little more time to season with Park Plaza versus Wailea, but I was just curious if you had any kind of the details handy to give us a sense of how they performed versus maybe expectation.

I'll tell you what, Jeff, let's get back to you with very specific numbers, which we have. I will tell you, for example, in Wailea, our RevPAR index versus the set has moved fairly meaningfully. As you know, we've talked about buying the best house -- excuse me, the worst house on the best street. And financial success for us was not replicating the rates that the Four Seasons or some of the other hotels achieved or currently achieve but closing that gap. And in terms of RevPAR -- excuse me, ADR Index, in roughly 2015 versus the really high-end portfolio, we were less than 50% ADR index. And we've moved that by over 10 points to just below 60%, so call it 48% to 59%, which is a meaningful move.

Now we'll hear from Bill Crow with Raymond James.

Let's start with Key West. John, one of the big annual festivals or whatever you want to call it, happened a couple of weeks ago down there. I'm just wondering if you can get a read on the amount of tourism that came down for it.

So Fantasy Fest was this past weekend, and we did see occupancy building from the time that we reopened the hotel. Occupancy started off in -- literally in the teens, build up to the 30s. We -- prior to Fantasy Fest, we were in the low 60s. And then for Fantasy Fest, it was lower than originally had forecasted prior to the hurricanes, but we did see more people returning to the Keys. So I would say that, that was incrementally positive. And we are hopeful that as the season progresses, the same continues as the market gets back on its feet.

That's helpful. It seems like there's been a couple of different narratives on the outlook for next year, particularly on the supply front. And I'm just wondering if you want to give us your perspective of where supply is heading, '18 and '19 generally.

Yes. It's Robert. I can chime in on that a bit.

I think the theme that we've talked about with supply remained fairly consistent. It is a market-by-market issue with certain markets just continuing to get new supply. Manhattan obviously sticks out as a market that's received meaningful new supply. Other markets that we've tracked or are expecting -- continuing to expect to see new supply, I think we're tracking about 6% supply growth in Manhattan in 2018, for example.

Other markets that we're expecting meaningful supply growth include New Orleans, which is expecting about 4% as well as Portland, I think, has been commonly referred to as a market that's got meaningful new supply. Obviously, if you look at these, it depends on where your hotel is. I'll use Philadelphia as an example. Our hotel in Philadelphia is actually really in Conshohocken, so it doesn't really get impacted by as much as of the central business district supply. So our supply there, while Philadelphia is seeing meaningful supply growth out in Western Philadelphia in that particular submarket, it's not as bad.

But if you look at it on a portfolio-wide basis, 2018, we're tracking somewhere between 2.5% and, call it, 2.75% to maybe slightly below 3% weighted average supply growth. Obviously, it depends on how you slice it and dice it, but that should be directionally correct.

And Robert, any markets that you think won't peak from a supply growth perspective until after '19?

Not that comes to mind-- don't have good -- no. Not that comes to mind.

Okay. And, John, finally for me. You're clearly focused on long-term relevant real estate. You still have some assets that I would guess you would put in the other bucket, including Houston. Can you just talk about prospects for sales over the near term?

Sure. We -- our strategy is very clearly to own long-term relevant real estate. And I think when you take a look at the bulk of our asset value, it would fit into those categories. However, there are still a number of hotels, maybe measured in total hotels, total rooms, our effort, that I would say fall short in some way, shape or form to that descriptor. And we will continue to methodically sell assets at the right time to continue to concentrate the portfolio into long-term relevant real estate. We have sold rough numbers close to $800 million of assets in the past, call it, 24 months, and I'd anticipate that to continue.

Now we'll hear from Smedes Rose from Citi.

This is [Pashmek] on for Smedes. Are there any markets that you'd consider exiting completely or any new markets that you'd look to enter over maybe the next 6 to 12 months? And would those be in primary or secondary markets?

External growth has become more difficult as evidenced by the fact that we've acquired one hotel in the past roughly 3 years, even though Robert and team have literally kicked tires and done exhaustive due diligence on well over $2 billion of assets in the not-so-distant past. I think the likelihood of us acquiring something in the near term is, let's say, relatively low. But anything we do acquire, it would fall in one shape or form as long-term relevant real estate. I would say that predominantly, those would fall into more primary markets.

Got it. And are you seeing like a lot of opportunities for more value-add acquisitions? Or would you -- would it still be dependent on the market and other factors?

All of the above. I believe that we have the deep expertise to do deep-dive repositioning as evidenced by the fact that we did or we completed successfully Wailea Beach Resort, Boston Park Plaza at the same time. I think both of those projects have been very successful, so I believe that we have the expertise in-house. However, I would say that, that will not be our only investment type. And when you take a look at Oceans Edge, that was a property that just opened up. And other than needing some operational enhancements, really requires almost no capital. So it really will depend.

And next, we'll hear from Chris Woronka with Deutsche Bank.

Apologize if I missed it earlier. Did you guys give out a group -- overall group pace for 2018?

Chris, it's John. Unfortunately, we have not provided guidance yet on 2018 or provided 2018 pace. However, I would tell you that as we stand today, the group pace for our portfolio is positive moving into 2018.

Okay, great. And second question is you guys sold BuyEfficient a few years ago, I guess, to Avendra. And now Avendra, itself, is getting a new owner. Do you guys anticipate any changes with the new owner?

That you would have to ask BuyEfficient or Avendra. Marriott has made public comments about the benefits that should inure to the existing owners. But other than that, we don't have any incremental lens on that, other than a happy client of Avendra.

Okay. Fair enough. And just on Houston, I noticed it looks like those hotels are not in the held-for-sale bucket on the balance sheet as of September 30. Is there a point they would have to move into that if they were being marketed? Or could something theoretically happen outside of that?

Chris, it's Bryan. There are several criteria, 5 actually, to determine whether or not something that's put into held for sale. You have to be marketing it. You have to have a likelihood of it transacting within a certain time frame. And so whenever something is taken out to market or maybe loosely shopped in the market, we evaluate that on a quarterly basis. And then if we met those criteria, we would then move it into held for sale.

And now we'll hear from Shaun Kelley with Bank of America.

So John, first of all, thanks for the comments on kind of all the personal stuff upfront. I think sometimes, it's easy in our ivory towers to lose track of all that, all the hard work that's being done, too, so thanks for the reminder there. And then...

Absolutely, Shaun.

And look, just one question because you guys have covered plenty of ground. But when we led off earnings season here across the lodging REIT sectors there was some concern around CBD performance and how that's stacked up relative to the overall kind of broader markets.

I think when we look at your core portfolio, I mean, clearly, we look at it in 2 buckets. You've got the renovated properties that are continuing to ramp extremely well and above your underwriting, and then you've kind of got the core. As we think about the core, your markets are a little bit different, and the portfolio is a little different than maybe just having kind of CBD-level drivers. And so I'm kind of curious like how do you stack up or think about the core performance and in this operating environment, whether it's kind of now or 4Q or whatever? Like just -- can you help us think about how you'd expect this to stack up versus the broader kind of baseline RevPAR numbers that we're seeing out there for the industry right now?

Yes. Shaun, I think you're hitting on an important point, and that is just stated very clearly without the significant growth, Boston of late or Wailea, which are real and meaningful to our company, the rest of the portfolio is just, as I said earlier, just kind of muddling along and not so dissimilar pound for pound from maybe what some of the other hotel REITs are generally reporting. And in general, modestly underperforming what the industry is doing as some urban concentrations seemed to be underperforming, notably Chicago, for example. New York has had its well-publicized difficulties. So I can't disagree whatsoever with the comment you made, Shaun.

Any reason Sunstone's portfolio looks a little different, performs a little differently in '18? I mean, we've exhausted San Francisco, so you can kind of leave that one out. But whether it's Chicago or company-specific initiatives on the renovation side or anything you're looking forward to in '18 that you'd highlight out of your geographic mix that investors may be overlooking?

Yes. We do have a sizable asset in San Diego that appears that it will have a pretty good year next year. We continue to believe that the best is yet to come for Wailea. And while Boston appears to have a little bit more gas in the tank, so to speak, into '18, we believe that the ramp on Wailea should be positive. And then finally, despite the fact that, unfortunately, a hurricane hit us a few weeks after we acquired it, Oceans Edge will deliver and will provide incremental earnings to the company over time. So that's what generally I would highlight.

And next, we'll hear from Thomas Allen with Morgan Stanley.

So in the press release, you highlight that the New York City, San Francisco and Portland markets outperformed your expectation. Can you just give us a little bit more color on what you think drove that?

Yes. A whole host of different things. And remember, going into this quarter, we had fairly low expectations for the quarter in general other than our repositioned hotels. And for those hotels in particular, we had assumed fairly negative RevPAR growth. And they just happen to come in slightly better, although in a couple of cases, still negative, but slightly better than our expectations and those expectations underlying our guidance and our forecast. With that I'll -- for some of the more details, I'll turn it over to Marc.

Yes. In San Francisco, the hotel benefited from short-term pickup of group that performed better, particularly on weekends. And then also over the Jewish holidays, which are typically softer, we did much better. In Portland, it was again -- well, the hotel is small. It was better group plus market benefit from the solar eclipse, to be honest with you. In New York, the market has had some short-term demand that helped absorb supply and it's city-based demand. And then the 2 Houston hotels benefited from the business that came through as the market resulted from the hurricanes.

Helpful. And then is there actually a way to -- do you think there's a way to quantify the hurricane displacement business in Houston?

Thomas, it's Bryan. In the third quarter, we think that from the 2 Houston hotels combined, we picked up about $0.5 million of EBITDA in business. Looking into the fourth quarter, they're -- that business, the hurricane-related business, whether it be construction crews, other crews, some FEMA business, that is very short term in nature. And so while we have some of that and we've had some of that in October, it's yet to be seen whether that will continue for the rest of the quarter. But for the third quarter, we had about $500,000 of additional EBITDA that obviously offset by what we had at Oceans Edge.

And then in the rest of the portfolio, the week of the hurricane, some of our group boxes, Orlando being one, which actually lost some group business but then backfilled with transient, did lose food and beverage. And then San Diego had, because of the difficult travel time, had some lost revenue during that time period also.

So should we read into it that you call out the Oceans Edge impact, but the rest of the Orlando, the San Diego, Houston kind of the impact of the hurricanes are kind of net neutral?

For the third quarter, it's slightly negative due to the group loss, but we're talking a couple hundred thousand dollars. Fourth quarter, we don't know yet what the impact of Houston, if it will result in positive pickup or not.

Now moving on to Floris van Dijkum with Boenning.

Great. I had a question. Could you maybe comment on the -- for the last quarter again, there was a significant difference in performance between your Marriott and Hilton-branded hotels. If there's any -- I mean, I know you don't have as many Hilton hotels as your Marriott hotels, but if you could maybe talk about some of the specifics around that.

No. I wouldn't take it that, that performance had anything to do with the specific brands. I would say it was more driven by hotel-specific factors.

Any one that sticks out, in your mind?

Well -- no. For example, the 2 Houston hotels did fairly poorly although better than expectations. Orlando had a -- Orlando Renaissance had a difficult comp to just a phenomenal third quarter of last year from memory. I think RevPAR was up something like 24% from the third quarter of last year with great food and beverage. In our Philly hotel in West Conshohocken, we had a tough comp because of the DNC. So I would say it was just more market specific than anything that the brands were doing.

Right. But the Conshohocken hotel was a Marriott, right? And your Marriott outperformed Hilton significantly, I think, by something like 6%, if I'm not mistaken, in terms of RevPAR.

Yes. The real outperformance between Marriott and Hilton is really driven heavily on Wailea and on our D.C. Renaissance, but Wailea in particular, which had over 90% RevPAR growth for the quarter.

Got it. And one other question I had for your $7 million tax gain on asset previous sold. Is that -- was there an earn-out? Was that part of the reason that, that was -- that dissipated?

No. There is no -- earn-out would have a cash implication, so it was a noncash. What it was, was a deferred gain based on a potential exposure to a liability that is now deemed to be remote. And so that's why at the time of sale, a piece of the gain from a GAAP perspective was deferred.

And now we'll take a question from Stephen Grambling with Goldman Sachs.

I realize it's still early, but are there any expectations for kind of core expense inflation on the horizon? Any reason that number could move up or down in the coming year? And maybe as a related follow-up -- some of your peers have alluded to limited contributions from the Marriott-Starwood merger to date. So what are you seeing? And what are your expectations?

I think the question was on the costs side. As we mentioned in prepared remarks, what we've seen is we have seen inflation on wages and benefits and particularly in certain markets. Chicago comes to mind. New York comes to mind. Just particularly some of those markets where there's incremental supply growth and competition for associates and managers has been on the rise. But overall, I would say that it seems later-cycle type of events where we are seeing pickup in wages and benefits. And then I think the question -- the second question was in result to benefits from Marriott-Starwood. I think a little bit too early to tell. We are anticipating benefits but still too early to tell.

And Patrick Scholes with SunTrust. Go ahead, please.

John, a number of your fellow REIT peers have called out in this earnings season weakness in inbound international. Are you seeing similar weakness? And if so, are you able to quantify that weakness?

Not really. The markets that would generally have international travel would be New York, a little bit in San Francisco. And then believe it or not, Maui is actually 90% -- roughly 90% a domestic market, unlike Oahu. So and there, we've seen a slight uptick, I believe, in Canadian tourism. So nothing significant that stands out for our portfolio.

Okay. And then just on the business that you have at the Key West hotel, how much of that is sort of longer-term contract business, say, government relief or redevelopment contractors?

0.

And our next question comes from Bryan Maher with FBR Capital Markets.

Just kind of a follow-up to Thomas' question earlier on Houston. A couple of the people have reported already have really highlighted strong RevPAR gains coming out of Houston with the potential for a long tail on that. It doesn't sound like you guys are leaning that way. Is there something at your properties specifically that don't give you that level of confidence that, that tail will be there for you?

Well, we think the tail will be there. Again, as we mentioned in the prepared remarks, Houston actually did better than we expected. Keep in mind, we were buoyed last year by a fairly sizable piece of contract business at our 2 hotels there that, that business went away in various quarters of this year. And we actually anticipated even more difficult comps going into the third quarter. So as I believe we outperformed, I believe from recollection, we outperformed in last year. We've taken a couple more lumps this year.

Looks like we have a follow-up from Anthony Powell with Barclays.

Just one more for me. How does Chicago fit into your long-term relevant real estate strategy? EBITDA is down, I think, roughly 21% year-to-date. Difficult market with high supply growth and cost inflation. How do you view that market long term? And what can you do there in the interim to stop the bleeding?

It's a great debate, Anthony. It is a phenomenal city. However, it is one city that the taxation issues and other issues within the city and a number of folks that continue to develop in that city make it -- have made it a little bit more challenging. Long term, we are happy with Chicago, particularly where we sit. Our Embassy Suites at State and Ohio is just a little engine that could time after time after time even though doesn't mean it's not going to be cyclical. But I do think that's a very good question. That's something that we debate internally.

And that does conclude our question-and-answer session. I'll turn the call back over to John Arabia for closing remarks.

Thank you very much, everybody, and have a wonderful and very safe Halloween. Take care.

And with that, ladies and gentlemen, this does conclude your call for today. We do thank you for your participation, and you may now disconnect.