Sunstone Hotel Investors Inc (SHO) 2019 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Fourth Quarter 2019 Earnings Call. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, February 19, 2020 at 12:00 p.m. Eastern Time.

I will now turn the presentation over to Aaron Reyes, Vice President of Corporate Finance and Treasurer. Please go ahead, sir.

Thank you, Derek, and good morning, everyone. By now, you should have all received a copy of our fourth 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 these 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; and Bryan Giglia, Chief Financial 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.

Thank you, Aaron. Good morning, everybody, and thank you for joining us today. We'll begin today's call with a review of the successful 2019, including the better-than-expected fourth quarter and full year operating results and earnings, which benefited from continued investments in our portfolio. Next, I'll provide our thoughts on the 2020 operating environment and discuss our approach to capital allocation. Afterwards, Bryan will provide an update on our fortress balance sheet and review the specifics of our initial 2020 guidance.

Let's begin with a recap of last year. In 2019, we continue to see the long-term benefits from the investments made within our portfolio over the last few years. Some of these investments including the renovation of Boston Park Plaza and Hyatt San Francisco resulted in meaningful RevPAR index gains and profitability increases over the last few years, yet we believe that these properties, in general, have reached stabilization. However, we expect to continue to benefit from other investments, including from the continued RevPAR index gains in Wailea as that hotel continues to benefit from a multiyear ramp up from the new ballroom at the Renaissance Orlando, which is attracting higher quality and larger groups from the 17 keys added to Hyatt San Francisco late last year and from the rooms renovations completed at the Hilton San Diego Bayfront early in the year.

Renaissance Orlando is a great example of how making strategic long-term investments translates into value creation and future earnings growth. In January 2019, just over a year ago, we opened a new 46,000 square foot state-of-the-art meeting space, which has not only generated great customer feedback, but has also helped the hotel produce the highest number of group-room nights booked at the hotel in a single year.

Moving on to smaller, yet equally important projects. We invested over $9 million into a variety of environmental projects during 2019, including retrofitting additional lighting systems, installing low flow plumbing fixture and bulk amenity dispensers as well as upgrading several building systems in order to reduce overall energy consumption. These important projects not only reduce the environmental impact on our portfolio, but in several cases, also result in attractive economic returns. We will continue to make these important ESG investments as we focus on waste to use more renewable energy; to reduce our usage of single-use items such as plastic containers, straws and trash bags; and to increasingly incorporate more reclaimed and recycled materials into our renovations. In addition to capital investments, we continue our ongoing initiatives to recycle capital and to concentrate our portfolio into long-term relevant real estate.

Late last year, we disposed of the leasehold interest in the Courtyard LAX for $50 million. The sales price equates to an estimated 5.8% cap rate on our full year 2019 forecasted NOI, which is roughly 200 basis points lower than the implied cap rate on the remaining portfolio as calculated by our recent share price in our 2020 guidance. That is, we sold one of the lowest quality hotels and one subject to a ground lease at a price well in excess that implied by our current share valuation. The sale further consolidates our portfolio into long-term relevant real estate and reduces our ground lease exposure.

While RevPAR comparisons don't always tell the full picture, it's worthwhile to note that the hotel's 2019 RevPAR and EBITDA per key was approximately 21% lower and 37% lower, respectively, and was the case for the remainder of our portfolio. Additionally, the sale of one of our last ground lease assets reduced our total at share hotel EBITDA subject to ground or air rates to approximately 15%, down from over 50% several years ago. We have only 3 leased hotels remaining in the portfolio. We are very pleased with our success in reducing our leasehold exposure to one of the lowest levels amongst the hotel REITs.

Now let's talk a little bit about recent operating results. Despite a challenging operating backdrop, we were pleased that our results came in near the high end of or exceeded our guidance for the fourth quarter and full year. Fourth quarter comparable portfolio RevPAR increased 80 basis points over the prior year and comparable portfolio total revenues increased 2.1%, bringing our full year RevPAR and total revenue growth to 1.9% and 2.9%, respectively. Consistent with our commentary in prior quarters, we continue to see room revenue growth driven primarily by transient segments. During 2019, transient room revenue grew approximately 3%, while group revenue was roughly flat.

Overall, our fourth quarter room revenue exceeded our expectations and contributed to a full year RevPAR growth at the high end of our guidance. In addition to stronger performance in the rooms department, total comparable portfolio revenue benefited from a 2.6% increase in food and beverage revenues and a 14% increase in ancillary property level revenues during the quarter. While hotel revenues were stronger than anticipated, hotel profits were negatively impacted by ongoing cost pressures, specifically in wages and benefits, property insurance and property taxes. Nevertheless, comparable hotel level EBITDA exceeded our expectations for the fourth quarter and resulted in full year adjusted EBITDA and adjusted FFO per diluted share that exceeded the high end of our most recent guidance.

So let's talk a bit about some of the positives and negative operating trends from the prior year. Full year 2019 results benefited from continued outsized growth in Wailea and from the contribution of our 2018 capital investments, specifically the renovations at JW New Orleans and Marriott Boston Long Wharf as well as the meeting space additions at Renaissance Orlando that I discussed earlier. In addition, we saw a better-than-expected market growth in Washington, D.C., and while the San Francisco market fell short, very lofty expectations that were in place at the beginning of the year, the city still posted solid RevPAR growth in 2019.

Offsetting these areas of strength was general market weakness in Chicago, Portland, La Jolla, New York City and disruption from the renovation work we had in process at the Hilton San Diego Bayfront and Renaissance Baltimore early in the year. More recently, operating trends in the fourth quarter were generally better than anticipated, particularly in December, and we were more -- and they were more encouraging than those witnessed in the third quarter. Several markets exceeded our expectations, including Wailea, Long Beach, Chicago and San Francisco. Transient business, in particular, performed better in the fourth quarter with higher-than-anticipated room rate growth, stronger food and beverage outlet sales and higher ancillary revenues.

Offsetting some of the fourth quarter was weakness in Key West, Times Square and San Diego. While our fourth quarter labor productivity improved, we were still negatively impacted by a 2.4% increase in hourly wage rates. Higher costs from property insurance and loyalty program expense also constrained profitability and contributed to a 110 basis point reduction in margins and a 1.4% decline in comparable portfolio EBITDA in the fourth quarter despite a 2.1% increase in comparable portfolio revenues.

Now let's turn our attention to our outlook for 2020. Our baseline assumption for this year is that the operating environment will be similar to that witnessed in 2019, including tepid RevPAR and total hotel revenue growth. We anticipate that the majority of our markets will experience limited RevPAR growth in 2020. San Francisco is expected to have solid levels of demand in 2020 by historical standards, but the year-over-year comparisons is expected to be challenging, given its strong performance in 2019. In addition, we expect headwinds to persist in New York as the market deals with another year of elevated new supply.

That said, we anticipate healthy growth in Key West, and in those markets with strong citywide calendars, including Boston, Chicago and Washington, DC. In addition, our recently completed renovations at the Renaissance Baltimore and Hilton San Diego Bayfront should result in RevPAR growth in excess of market levels. Finally, we expect Wailea Beach Resort to once again be one of our strongest performers in 2020 as the hotel continues to gain share and further surpass our expectations. While RevPAR growth is expected to remain roughly flat, we expect to see a continuation of elevated cost pressures primarily in wages and benefits, property taxes and insurance. Collectively, these 3 line items make up just over half of our total hotel level operating costs.

Additionally, we are engaged in a dispute related to the scheduled ground rent increase at the Hilton Times Square that may not be resolved until later in the year. During this dispute and appeal period, we will record the higher rent expense and will receive a refund if we are successful with our appeal.

From a capital perspective, the renovation work -- our renovation work is fairly limited in 2020 and should result in less disruption compared to prior years. Our primary project this year is the full repositioning of the Marriott Portland, which is currently underway and going exceptionally well. The work includes the renovation of all 249 guestrooms and bathrooms, the addition of 9 new guest rooms and then the complete redesign of all public spaces, meeting areas and food and beverage outlets. The renovation is intended to better position the hotel to compete with many of the independent lifestyle hotels in the Portland market. We expect to incur $2 million of total revenue displacement in the first half of 2020 in connection with this project.

As we move into 2020, current year group pace for the portfolio is up over 4% and we have 81% of our groups already on the books, which is the highest crossover level that we've had in the last several years. Our guidance for the first quarter and full year takes into consideration roughly $1 million of lost revenue related to already identified group cancellations and attritions in San Francisco, San Diego and Washington, D.C., attributed to the coronavirus. We expect to mitigate some of this revenue loss through cancellation fees and additional transient bookings, so the net impact is expected to be less than $1 million mentioned. However, it is important to note that our 2020 expectations and earnings guidance do not include any additional impact from the coronavirus, which if were to have a negative impact on global economic growth and travel, could materially impact our business, our earnings and our outlook for 2020. It's simply too early to accurately assess the impact on our hotels or what it can mean for RevPAR growth, margins and profitability for our portfolio.

So let's talk a bit about the current investment environment. As we've discussed on prior calls, we continue to struggle with the current pricing expectations on long-term relevant real estate. During 2019, we actively underwrote several billion dollars of single assets and portfolio transactions. We've been on several of these potential investments, but in the end, we're not willing to pay the prices needed to compete for an acquisition. Pricing expectations for high-quality assets that fit our strategy remain elevated and translate into cap rates after property tax resets below 5% in most cases; and in many cases, cap rates in the mid-3s to mid-4% range. Looking forward, we continue to expect to underwrite new investments and remain hopeful that we will find the right opportunities that will add to our shareholder value over time. At the same time, we expect to dispose off the remaining hotels that do not fit our strategy at reasonable prices. Considering the recent range of our stock price and the resulting implied valuation, we continue to believe that the best use of our excess liquidity will likely be to repurchase our own shares even if that means shrinking the size of the company in the short term. It's for this reason, we increased the size of our share repurchase program from $300 million, of which we had purchased $54 million, to a new authorization of $500 million. As we've said before, our repurchase activity will not be programmatic, rather it's likely to occur opportunistically and be share-price dependent.

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

Thank you, John, and good morning, everyone. We ended 2019 with significant financial liquidity, including more than $680 million of total adjusted unrestricted cash and an undrawn $500 million revolving credit facility. We have approximately $1.2 billion of consolidated debt and preferred securities outstanding, and our current in-place debt has a weighted average term to maturity of approximately 4.1 years and a weighted average interest rate of 4.1%. Our variable rate debt as a percentage of total debt stands at 23% and 44% of our debt is unsecured.

Now turning to first quarter and full year 2020 guidance. A full reconciliation can be found in our supplemental and in our earnings release. Our 2020 guidance does not assume any additional share repurchases nor does it include the impact of any additional asset sales or acquisitions. As John indicated earlier, other than what we have been able to identify to date, our guidance does not include any potential additional impact from the coronavirus, which could have a material impact on travel, hotel demand and profitability.

For the full year, we expect total portfolio RevPAR growth to range from down 1.5% to up 1.5%. We expect full year expense growth to increase 3% to 4%, driven by a 4% to 6% increase in wages and benefits, which make up 45% of our total costs. This expense growth is expected to result in a same-store margin decline of approximately 150 to 175 basis points. Our full year 2020 adjusted EBITDA guidance ranges from $280 million to $305 million, and our full year adjusted FFO per diluted share ranges from $0.95 to $1.05.

Our outlook for 2020 includes approximately $2 million of total revenue displacement and approximately $1 million of EBITDA displacement related to our planned 2020 capital investment projects. In addition, our guidance includes approximately $2.4 million of additional expense related to a disputed ground rent increase at the Hilton Times Square, which is scheduled to increase starting May 2020.

For the first quarter, we expect total portfolio RevPAR to range from down 0.5% to up 1.5%. We expect first quarter adjusted EBITDA to be between $54 million and $58 million and adjusted FFO per diluted share to be between $0.16 and $0.18.

Finally, this guidance reflects our existing 20-hotel portfolio and does not assume any additional hotel dispositions nor does it reflect the incremental future earnings potential that would result from the deployment of our cash.

Now turning to dividends. Our Board of Directors has declared a $0.05 per common share dividend for the first quarter. Consistent with our practice in prior years, we expect to pay a regular quarterly cash dividend of $0.05 per share of common stock throughout 2020. To the extent that the regular quarterly common dividends do not satisfy our annual distribution requirements for 2020, we would expect to pay a catch-up dividend that would generally be equal to our remaining taxable income.

Our total cash dividends for 2019, including our fourth quarter catch-up dividend equates to an annual dividend yield of approximately 5.5%. In addition to the common dividend, our Board has also approved the routine quarterly distributions for both outstanding series of preferred securities.

With that, I'd like to now open the call to questions. Derek, please go ahead.

(Operator Instructions)

And we'll take our first question from Lukas Hartwich with Green Street Advisors.

Fundamentals continue to be pretty weak. I'm just curious, you kind of commented on hotel values. It sounds like there's still a robust bid out there. But are you seeing any impact to hotel values given this tough backdrop for fundamentals?

Lukas, we now had bifurcated into a couple of groups. For those assets that are really high-quality, high-ends, iconic, long-term relevant real estate, there's still an incredibly strong bid for those assets. There's a value-add component or something interesting in terms of the ability to bring in new management or if the franchise is subject to change, then I think that there's a pretty strong bid for that as well. For more commodity assets, I think it gets a little bit more difficult.

That's helpful. And then can you provide -- you touched on this a little bit, the Wailea Beach Resort continues to ramp. In the past, you've talked about the rate gap there. Can you remind us what it was prior to the renovation? What you expected and where it is today?

Lukas, it's Bryan. When we acquired the hotel, and when we talk about the concept, we're talking about the Wailea luxury set. On a full year basis, the hotel in 2014 was about $280 behind that set; ending this year, we are 100 -- or ending '19, we are $180 behind that set. So we took the ADR index from 48% to about 70%.

Great. And then do you have a sense of what the EBITDA per key for those -- that comp set is?

No, not on an EBITDA per key basis. We would have RevPAR, but not EBITDA per key.

We'll next go to Smedes Rose with Citi.

I wanted to ask you just a little bit more about the Hilton Times Square. You mentioned that some property taxes increases are going to weigh on your full year margin expectations. And it seems like that's maybe around $4 million or so of incremental taxes. And then you have about $4 million of interest expense there, then just looking at the EBITDA that came in for the year and the fact that, that debt, I guess, needs to be refinanced coming into the year, so I'm just wondering if you can maybe talk about some of the, I guess, issues facing you there and what may be your longer-term plans are?

Smedes, the property tax did go up on that hotel. That's not part of the disputed amounts that we were talking about. I think if you look across the Board, property tax in a lot of markets is an item where you continue to see pressure, especially late in the cycle. And so when you look at our fixed costs in many markets: Boston, Chicago continues to be a market, Orlando. These are all markets in New York. These are markets where we see significant property tax increases. For the Hilton Times Square, specifically what we have under dispute right now is about a $3 million increase to the ground rent expense. That is, the lease has a reset that happens in mid-2020 this year. The City of New York is our landlord. They have noticed us that they believe that, that ground value, which is how the rent is calculated, has increased. We believe very strongly that it hasn't, given the pressures that, that market has been under. We are going through the arbitration process now, which will take time. But unfortunately, per the lease, we are forced to pay the higher amount during that arbitration period. And then once, if we are -- if we prevail, we would get a refund. But we will have to absorb that amount, which I think is about 30 basis points on margins, until we have a final decision. When you look on a pro forma basis, those increases to the Hilton's costs, including the loan, interest expense, the EBITDA being produced by that hotel is minimal, if any. And so we will -- the maturity isn't until later this year, we will assess any options we have at that time and come up with what the best course is for us.

Okay. And then, John, I just wanted to ask you, I mean, you said that the buybacks will be opportunistic versus programmatic, but you also made your commentary that suggests you think the stock has been significantly below with underlying asset value. And I'm just wondering why wouldn't you have a more kind of programmatic or aggressive repurchase program in place at these levels?

Yes, Smedes, we're really not going to comment on how we're going to approach the share repurchase. But clearly it's something we're highly focused on and something that we think represents our best incremental investment, at least relative to any potential acquisitions.

We'll next go to Anthony Powell with Barclays.

John, you mentioned that you saw better transient trends in December. Could you describe if that was business or leisure transient? And how those trends persisted? Or have they persisted into January and February here so far?

Yes, we actually saw a pretty good demand in both transient corporate and transient leisure in our portfolio in December, and it was fairly broad-based. Wailea just had an absolute home run in the fourth quarter. What we saw as compared to what we saw in a couple of quarters earlier than that in 2019 was a good portion of our hotels actually saw an uplift in what had been expectations that had been revised down during the year. So overall, we were fairly pleased. What we've seen recently and, I'd say, over the last 6 weeks is, we've actually seen a little bit of an uptick in our transient bookings. We already have a good amount of group business on the books for March. But when we take a look at the first quarter, we've been pleasantly surprised that after a few months of transient weakness in terms of short-term bookings that we had mentioned on our last call, the past 6 weeks have actually been pretty good.

Got it. So with an uptick in transient bookings and in group pace up 4%, how does that fit with the RevPAR guidance of negative 1.5% to plus 1.5%?

That was just one of the many inputs. When we look through each one of our hotels, it's one of the inputs. So don't know what I can add to that.

And Anthony, if you look on kind of our view on the quarterly basis, the weakest quarter would be -- is expected to be fourth quarter this year. Certain markets, especially with the election, DC is expected to be softer, and during the -- during November, a pullback in business trending around the election is expected. And so that's in our budgets, in our forecasts, which if that proves to be otherwise, then maybe you get a little bit more pickup in the fourth quarter.

Got it. Understood. And just broadly, have you started to talk with the brands about how to address this profitability issue that the owners are facing across the country. It seems like with RevPAR of 1% and cost of 4%, it's not going to really work for the owners of the brand in terms of getting incentive fee growth. Have they been talked about brand standard fee -- brand standard changes or other ways to improve profitability at the hotel level?

Yes, it's a constant communication between our operating partners and ourselves. But the simple fact of the matter is, look, if the cost of labor is going up and there are -- it's become more difficult to find folks to work at the hotels, obviously, those -- that is a cost pressure that is just difficult to deal with. I think it's premature, and I might be in the minority on this, but I think it is premature to start saying that we would have significant cutbacks in terms of overall service levels, particularly with the quality of the portfolio we have, I just think that, that's a wrong long-term decision to make. Obviously, if we saw a material decline in terms of occupancy and rates, everything is on the table. But I think that's probably premature at this point to move into in a material way.

We'll next go to Bill Crow with Raymond James.

As you look out next 3 or 4 months, is there anything out there in the citywide schedule in markets like San Francisco, San Diego, D.C., you highlighted earlier that because of their -- because of the nature of the events, may have more sensitivity to the coronavirus inbound international travel that are at risk here, that are going to make the headlines that we have to worry about?

Yes, there's always some level of concern with a great unknown like this, Bill. And when we take a look at those markets that have the largest amount of inbound Chinese travel, those being San Francisco, L.A., New York, we are talking with our operators trying to assess risk. And I think the potential risk could show up in a couple of different ways. On a direct path, could we see a decline in Chinese travel, sure. That, for us, represents about 50 basis points of our total revenues. So it's a very, very small number. When you take a look at the groups, I think you'd see it manifest itself as we have seen it already in terms of potential group cancellations, which we've seen a couple of small ones or delegations from China, et cetera -- China, Asia, et cetera, not coming, so that will either force a cancellation or more likely a higher level of attrition on certain groups. So what we have been doing over the past week or 2 is working with all of our hotels and our operating partners to make sure that we are doing as good a job as we can in a very, very cloudy environment, so to speak, to make sure that we're managing our attrition to those groups and our scrub, so to speak, well enough to make sure that we're opening up transient channels just to make sure we can maximize the occupancy that we can. So it is a very, very fluid situation. Thus far, I would say that the impact is pretty modest. But given what we've seen in other parts of the world, there's obviously more concerning scenarios that one could paint, although we don't see any evidence of that now.

Okay. I always like to talk big picture with you, John. I appreciate your thoughts. If you were convinced that RevPAR growth was going to be in this kind of plus or minus 1% range for, say, the next 3 or 4 or 5 years, what would you do differently?

Let's see. RevPAR growth, all right. So let's take that scenario, which I did not believe to be the case, let me just put that upfront. But it's a scenario, your hypothetical, your painting. So if RevPAR growth was, let's say, 0 to 1% for most portfolios over a prolonged period of time, my gut tells me that expense growth will continue to outpace that, that the world -- the economy will stay in this type of picture, that asset values will remain a bit elevated. It will be an awful environment in which to be a capital allocator. If that happens, I think what you'll see is a drain on earnings and a difficult environment in which to capital allocate. That would be a tough go, Bill.

Yes. And then one final one for me. You talked about potentially shrinking the company, which I understand. But at what point does the dividend come into consideration? I don't mean the nickel or quarter, I just mean the total and maybe some reluctance to see a big change in the fourth quarter dividend.

Yes. One of the things I love about our dividend strategy is we payout 100% of our taxable income or roughly 100% of our taxable income. Obviously, our nickels per quarter, the routine dividend is very safe; as one would expect, particularly, with our fortress balance sheet. We have paid out over the past couple of years a lot of gains on sale, which has positively impacted our dividends. So I would have to take that into consideration. But our expectation would be that we will just continue on that path of paying out 100% of taxable income. And we think that, that works with us.

We'll next go to Patrick Scholes with SunTrust.

John, question for you. Yesterday, there was an article in The Wall Street Journal discussing rising foreclosures and defaults in the New York City hotel market. When does Sunstone step in to take advantage of something like that? How are you thinking about timing on that type of scenario?

We clearly have the ability. As Bryan just mentioned, we have our own hotel to work through currently. We will be happy looking at distressed situations and potentially taking advantage of those, but the timing on New York, I think, we're probably a little early there.

We'll next go to Chris Woronka with Deutsche Bank.

I wanted to ask on your full year guidance, how much of maybe uplift in non-room revenues? How do you underwrite that kind of stuff? And is there another pretty good uplift embedded in guidance for the year or do you assume something pretty modest?

Chris, our expectation right now is that non-room revenue will increase between 2% and 4% this year. Some of that's driven by some fees that went into place last year that are not fully -- that haven't fully anniversaried yet. And so while on the food and beverage side, we definitely see that moderating. And on the banquet food and beverage side, we see that moderating from where we've had the last couple of years. But we have some of these other fees that are still ramping up.

Okay. That's helpful. And then on the share repurchase, I think, you mentioned that the release was done at $12.66, which was really good timing on your part. Did you stop that because of -- was it an earnings blackout period that came into effect? Or was it just -- you just decided to stop at a certain level?

That was done in conjunction with our 10b5-1 program. And so that we had set our parameters before we went into a blackout period and so that was done automatically, so to speak. And we hit a pre-described level and amount. So that do window typically opens back up to where we have more direct control on that, opens up a couple of days after earnings.

Okay, great. And just on Wailea, to go back to the -- you gave out the ADR index. If you get to where you want to get to, which is, I guess, is 100% or better of the market. Is that -- should we assume that, that's going to pretty much flow straight through to the bottom line? Or is there any kind of step function in terms of incentive fees or other expenses that would come into play there?

Yes. Well, one can always dream. I really do not think that, that itself will ever get to 100% of index in what is an incredible comp set, including the Four Seasons and what our friends over at Houston and at the Andaz and the Fairmont. So financial success to us was closing that gap a bit and we have massively outperformed that. So I think there's a little bit of a more RevPAR index gain that Bryan had mentioned, but we will not get to that point. At one point, this hotel versus the Kaanapali comp set was probably in the 80%, 80-plus percent index, and we've gotten the hotel up to about 120% index versus that comp set, which we think is reasonable considering our location and the amenities that we now provide.

Our next question comes from Rich Hightower with Evercore.

John and Bryan, I'm asking this only because the 10-K just hit, as I was thinking of a question to ask. But can you walk us through the impairment charge at the Renaissance Harborplace and square that against the renovation expense plan for this year, really quickly?

Rich, the renovation at Harborplace was completed last year and that was a cyclical rooms renovation that was -- had been scheduled for some time. When it comes to impairments, GAAP requires us on a quarterly basis to look for indicators of impairment, which could be declining. They could be market conditions. They could be declining occupancy rates or something specific to the hotel. And on a normal basis, we'll have a handful of hotels that might have an indicator of impairment from time to time. The next step after you've identified those with indicators of impairment, as you look at the undiscounted cash flow of the hotel, your expectation of that over what your hold period is. And typically, since we're an infant-like vehicle, we look at a 10-year hold, and you look at the undiscounted cash flows through that time period and then the terminal value of the hotel after that, which usually doesn't lead to any sort of impairment unless the hotel has been -- has had significant declines. What we did and what led to the $24 million impairment on this hotel is, if this hotel is not deemed to be a long-term relevant hotel, we do now shorten the hold period for that hotel, which resulted in a lower cash flow, total cash flow than what our book value was and that led to the impairment.

Okay. And so in the impairment charges against the improved asset value and post renovation, specifically?

Correct. It's compared to the net book value, which would be the gross value, less depreciation.

Okay, okay. That's fine. My other question, just to -- just on the topic of expenses again. Can you guys translate the margin decline guidance into sort of same-store expense growth expected for 2020? And then maybe break that down across the major categories that you mentioned: labor, property taxes, et cetera, just so we can look at it that way as well?

Yes. So if you look at -- and I think what we said in the prepared remarks was that the expectation of total expenses was going to increase, call it, 3% to 4%. That -- if you look at the different pieces of that, so let's take labor, salaries and wages first. That's going to be roughly 45% of our total cost, if those are increasing 4% to 6% and then everything else from the hotel side of things are much less closer to inflationary growth, even some items like group commissions might be down a little bit. The other expenses though -- and really, it's the fixed expenses, those are seeing larger increases this year. Real estate and property tax continues to be significant growth. Major markets: Boston, Chicago, New Orleans, all had major increases to all property owners this year. Ground rent at Hilton Times Square, while it's under appeal is also negatively impacting that. And then insurance, as you recall, the property insurance rates went up significantly last year. Our policy starts in July, so that has still half year of impact. So the other half of the expenses are great -- or 55% of the expenses are, say, increasing 3% to 4% or maybe 2.5% to 3.5%. That's going to give you a combined increase of 3% to 4%, where for total hotel expenses.

We'll next go to David Katz with Jefferies.

I wanted to go back to the share repurchase aspect of it. And without getting to specifics about execution, I wanted to just revisit the philosophy behind it. Should we take some meaning and the expectation that you just have more capital it can have a sort of viable use for otherwise. And this is sort of the default avenue or is this something that could be an ongoing aspect of the capital structure, capital utilization going forward?

Yes, I think it's really more the latter, David. That share repurchase is a capital allocation tool made available to public companies that can arbitrage between public and private both ways. So I think it's -- we have always said, it's not a signaling tool. We don't use it to signal the market our shares are cheap. We use it as a capital allocation tool and as we continue to look out in the environment and see asking prices that are difficult to justify, we do know that while not every single one of our hotels within our portfolio is long-term relevant real estate when you take a look at the bulk of our value anchored by properties like Wailea, like Embarcadero, like Long Wharf, keep going. Most of our value is in those hotels and an easy way for us to buy more long-term relevant real estate is simply to buy back our own stock. We know the assets incredibly well. Really no transaction costs of any materiality to be discussed. There's no transfer taxes, et cetera, et cetera, et cetera. And there's some amount of scale that we can execute that investment on behalf of our existing shareholders. So I don't think it is something that's on the table all the time. Because I'm hopeful that at some point, we get back to a point of trading at a premium to NAV and can grow this company in a beneficial way. But to the extent that we have to play the cards that were dealt to us now in trading at a discount to NAV. Now when I take a look at one of our clear advantages, and that is our balance sheet, we have the ability to execute on that. So we've been as forthright I think as possible in saying that, that remains our most attractive investment alternative.

Perfect. And if I can just one quick follow-up. I know that we are always trying to measure the stack on your collective desks of deal opportunities that you think are viable. My question is, is the stack getting progressively shorter or is it choppy? How would you characterize that stack of viable opportunities to consider?

A couple of things that we're working on right now, a couple of things that we've bid on in the last kind of month or 2. We have our fingers on a couple of things that we think might eventually come to market that we're hopeful will or that we're trying to do direct with somebody. So it's sporadic. There's been some volume and when I mean volume, it -- we're talking, we tend to go after fairly chunky assets. I mean assets that are -- it's probably pretty rare that we look at an asset that's $30 million, $40 million, $50 million, not to say it couldn't be done. But a lot of the assets that we look at are $200 million, $300 million, $600 million. So it's chunky.

Chunky? Perfect.

Probably not a good financial term, but I'll use it.

We'll next go to Amanda Sweitzer with Baird.

I was hoping you could address just your lower projected CapEx spending. I mean your 2019 spending came in meaningfully below your initial guidance. And then, 2020 is also lower than what we were expecting as well. Are you kind of systematically reducing CapEx spending due to where you see fundamentals? Or is there something else that's driving that trend?

Well, one reason that the number went down because we sold the Courtyard LAX, which was slated for a pretty significant renovation. And the other, we decided to postpone the renovation on the rooms for the Embassy Suites Chicago, that will eventually be done, but we just pushed it out a bit. And then just the way that the calendar rolls with how the overall portfolio. The overall portfolio is in really good shape. There'll be some couple of other renovations that will happen in '21, '22, '23, but that's a normal course of business. I wouldn't say that there's anything specific in terms of delaying renovations. We believe strongly that, that delaying renovations just to try and save capital is a bad business decision. It has to start off with what does the hotel need? How would the hotel best position itself? And clearly, our balance sheet allows us to make those investments when we think it's the right time.

We do have a follow-up question from Bill Crow with Raymond James.

John, just a couple of little points here. The strength in December, some of that's been attributed to the change in the calendar. Is that -- is there anything to that? Or was this real legitimate strength that you saw?

No. I mean, hopefully, we saw the changes in the calendar happening. And while sometimes that throws us for a little bit of loop, I think, we had that covered. It just happened to be stronger bookings short-term in overall transient business and, again, including places like Wailea. So overall, it was a little bit more broad-based. But when I say that, let's keep in mind that this is 1 month. And I wouldn't necessarily say 1 month sets a new trend or a new direction in trend. Just like the couple of months before that, that we were a little bit weaker than anticipated, I wouldn't say that, that was the case either.

And then same sort of question, but both you and Hilton pointed to an uptick in demand over the last few weeks in transient demand looking forward. And again, is that seasonal? Is it above and beyond what you would see in a seasonal recovery? Can you categorize it at all?

Yes, it's adjusted for seasonality. So we're just taking a look at the total number of overall transient reservations made. And on a rolling -- on an individual week basis, but then on a rolling 6-week basis, and we've seen a little bit of an uptick. I think a couple of quarters ago, I had mentioned that we saw a little bit of weakness that we were continuing to monitor. And just recently, despite all the concerns in the world about various things, the past 6 weeks have actually been pretty good.

We also have a follow-up question from Anthony Powell with Barclays.

Just one more for me in Portland. Did you consider maybe switching to a different brand besides Marriott in Portland to W or some other kind of more lifestyle brand as you renovate that hotel?

That's probably a thought for a little later on. We are -- we have a couple of years left in the franchise agreement there, so that's an opportunity for us in the future to consider some of those options.

And gentlemen, we do have no further questions in the queue at this time. I'd like to turn the conference back over to John Arabia for any additional or closing remarks.

Thanks, everybody, for your interest. We are around today, if there's any follow-up questions. And if not, we will be seeing many of you at several of the upcoming conferences. Have a great day.

Thank you. And again, that does conclude today's call. We do thank you for your participation. You may now disconnect.