Xenia Hotels & Resorts Inc (XHR) 2017 Q3 法說會逐字稿

Good day and welcome to the Xenia Hotels & Resorts, Inc. Third Quarter 2017 Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to Lisa Ramey , please go ahead.

Thank you, Rachel. Good morning everyone and welcome to the third quarter 2017 earnings call and webcast for Xenia Hotels & Resorts. And here is Marcel Verbaas, our Chairman and Chief Executive Officer; Barry Bloom, our President and Chief Operating Officer and Atish Shah, our Chief Financial Officer. Marcel will begin with a discussion of recent activities and an overview of our third quarter results. Barry will follow with a more detailed discussion of operating results in the quarter. And Atish will conclude our remarks with an update on our balance sheet and our guidance for the remainder of the year. We will then open the call for Q&A. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K and other SEC filings, which can cause our actual results to differ materially from those expressed in, or implied by, our comments. Forward-looking statements and the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, November 7, 2017, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in this morning's earnings release. An archive of this call will be available on our website for 90 days. With that, I'll turn it over to Marcel to get started.

Thanks, Lisa. And thank you all for joining our call this morning. The past several months since our second quarter call have been eventful to say the least. Before I turn to our recent activities and our third quarter results, I would first like to once again thank the management teams and their associates at our hotels that have had to deal with various natural disasters over the past few months. We are proud of each of the teams for their dedication and commitment to our hotels while dealing with personal hardships and tending to the needs of their families and communities. Several of our hotels were operationally impacted by Hurricanes Harvey and Irma in the third quarter. And to a much lesser extent, Hurricane Nate early in the fourth quarter. Additionally, operations at our 2 hotels in Napa were impacted by the recent wildfires that cost significant disruption in the Sonoma and Napa Valleys. As we reported in this morning's earnings release, our hotels in Houston have rebounded well in the aftermath of Hurricane Harvey, and our Key West property is open and fully operational following Hurricane Irma. As it relates to the Northern California wildfires that occurred in October, both of our Napa hotels are currently open and fully operational. While neither sustained direct fire damage, we are continuing to evaluate the extent of damage including smoke and other consequential property damage as well as business lost during and in the aftermath of the fires.

We have estimated the operational impact of the hurricanes and the wildfires in our updated guidance for the year to the best of our abilities. Atish will discuss it in further detail later in the call. We are also continuing to evaluate our ability to recover amounts for business lost as a result of these natural disasters through business interruption insurance we have in place with all of our hotels. We expect that any potential proceeds recovered through these insurance claims would not be received until 2018. Before we review our third quarter results, I would like to provide some additional color on the exciting acquisitions we announced in early October. As discussed on prior quarterly earnings calls, we entered the year with significant investment capacity and a portfolio and balance sheet that was strengthened considerably through our activities in 2016, a year during which we were a significant net seller of hotels.

As such, our expectation was that our portfolio and activities in 2017 would be more balanced between dispositions and acquisitions with a bias towards being a net acquirer based on the opportunities we were seeing in the market.

As you will recall, we executed on this strategy earlier in the year through the disposition of 7 assets on the lower end of the portfolio, while effectively replacing these assets through the acquisition of Hyatt Regency Grand Cypress in Orlando. We remain excited about this acquisition and are making good progress on executing the improvement plans we have previously outlined for the hotel. In early October, we utilized our investment capacity to acquire 3 outstanding hotels and 2 separate transactions for a total consideration of $410 million. We continue to expand our relationship with Hyatt and reenter the Phoenix market with our acquisition of the 493 room Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch and the 119-room Royal Palms Resort & Spa. A luxury resort, which is part of the Unbound Collection by Hyatt. We acquired both assets directly from Hyatt for a total purchase price of $305 million.

In addition, we increased our exposure to the Washington, D.C. markets, a market we believe to be strong and stable for the long-term. With the acquisition of the 365- room Ritz-Carlton Pentagon City for a purchase price of $105 million. Each of the hotels we acquired in these transactions complements our existing portfolio well and offers unique opportunities to drive future growth. Guest room renovations were recently completed at Hyatt Regency Scottsdale and Royal Palms, and we anticipate additional performance lift as the hotels continue to stabilize . We also expect the recent branding of Royal Palms as part of the Unbound Collection by Hyatt to yield positive results. The Ritz-Carlton Pentagon City also recently underwent a room renovation. While the fashion center at Pentagon City, the mixed-use facility connected to the hotel underwent a significant upgrade and expansion. We believe both of these factors will drive revenue growth for the hotel. As we have spoken about frequently, we are strong believers in owning a portfolio that is diverse as it relates to locations and demand generators. We were excited to have been able to acquire assets in desirable markets where we either have no exposure as in the case of Phoenix or where we have the ability to increase our exposure as was the case with the D.C. market. Additionally, we increased our exposure to group leisure and government demand through the addition of these, 3 high-quality hotels. Having a portfolio that is not overly concentrated in a few markets and it is not overly reliant on one particular source of demand should serve as well in both the short and the long-term. As Barry will discuss later in the call, we believe our asset management team will be able to increase efficiencies at each of the hotels as they are integrated into our platform. We will also carefully evaluate a number of potential ROI projects at each of these hotels over the next few months. We have significantly upgraded the portfolio through the completion of over $825 million in transactions in 2017. Meanwhile, we have maintained a moderate amount of leverage and a balance sheet that features no short-term maturities, a good balance between secured and unsecured debt, and an appropriate mix of fixed and floating rate debt. Each transaction represents a continuation of our overall strategy and we pride ourselves on our ability to create value for the long-term through timely transactions, a core strength of our team. We strongly believe the upgrade to our portfolio through the strategic transactions will create long-term value for our shareholders. As a result of transaction activity this year, not only has the overall quality of our portfolio improved significantly, but so has the long-term growth profile and overall supply picture. Our current portfolio at 2016 RevPAR that was 3.4% higher than the 42 hotel property portfolio we owned at the end of 2016, which is just one measure to demonstrate the -- demonstrates the improvements in portfolio quality. The estimated weighted average supply growth in our market tracks was reduced by approximately 50 basis points in 2018 and over 100 basis points in 2019. Further, solidifying our position among peers with one of the lowest anticipated supply increases over the next few years.

I will now turn to our third quarter results. Our third quarter operating results exceeded our expectations despite the short-term negative impact of the hurricanes and we were pleased with both top line results and our ability to maintain strong margins despite a decline in RevPAR. During the quarter, we had net income attributable to common stockholders of $11.6 million. Our adjusted EBITDA was $63.6 million and our adjusted FFO per share was $0.50. We expensed $1.2 million for estimated hurricane-related repairs and cleanup costs across all impacted properties. This has been added back to our adjusted EBITDA and adjusted FFO. These onetime costs were expensed as we do not believe they will be reimbursed by property insurance, given our individual hotel level deductibles. Please keep in mind, our same-property portfolio numbers reflect the 36 hotels owned as of September 30, including Hyatt Centric Key West as if all rooms had been available during the quarter. We have elected to not remove Key West from our same property results since the property was closed for a very limited time during the quarter, as the hotel's management team and our project and asset management teams did an outstanding job for getting the property fully open and operating within a short time frame. Same property numbers do not include the 3 hotels acquired in early October.

We experienced a better-than-expected decline of 1.3% in same property portfolio RevPAR in the third quarter with July down 1.3%, August down 0.4% and September down 2.2%. In August, our 3 Houston properties were impacted by Hurricane Harvey. Harvey caused severe flooding in the Houston area making transportation throughout the city a challenge, and this negatively impacted results in late August and early September. Each of our hotels remained open during the storm and benefited during the balance of September from increased post hurricane demand in the city.

For the quarter, RevPAR for our Houston hotels increased 8.6% over last year, resulting in a year-to-date RevPAR decline of only 3.5% for our hotels in the market. We continue to anticipate that Houston will have a slight negative impact on our overall full year portfolio results, although this impact is now much more muted than our expectations at the beginning of the year when we expected our Houston hotel RevPAR to decline by approximately 10% in 2017. Based on recent performance, we now expect our Houston RevPAR to decline between 0% and 2% for the full year. As anticipated, September results were negatively impacted by the shift in the timing of of the Jewish holidays. The impact of Hurricane Irma on several of our markets, notably Key West, Orlando, Atlanta, Charleston and Savannah also influenced September results for the portfolio. Hurricane Irma impacted 8 of our properties in the Southeast. Hyatt Centric Key West was closed for 16 days during September after the mandatory evacuations of the islands and necessary cleanup at the property following the storm. RevPAR at the hotel was down 13.1% for the quarter, negatively impacting our same property RevPAR by approximately 20 basis points. The shift in the timing of the holidays and the increased demand in Houston after American Harvey is expected to positively impact our fourth quarter results.

Atish will provide more detail on our revised guidance later on. But it is worth noting that our current portfolio, including our 3 newly acquired hotels experienced an approximately 5.5% RevPAR increase in October, despite the negative impact of the California wildfires on our Napa hotels during the month and minor disruption at our New Orleans and Birmingham properties due to Hurricane Nate in early October.

Now before turning the call over to Barry, I would like to once again congratulate him on his recently announced promotion to President of Xenia . In addition to the significant upgrades to our portfolio we have been able to achieve over the past few years, I am particularly proud of the strength and depth of the management team we have been able to assemble. Barry has been instrumental as a leader in our company since his joining in 2013. And I look forward to his continued contributions to drive shareholder value in his new position. Barry will now discuss our third quarter operating results in more detail and provide an update on our renovation projects.

Thank you Marcel. Let me begin with the review of the hurricane impact across our portfolio for the quarter. During Hurricane Irma in addition to our hotel in Key West, our hotels in Savannah and Charleston, South Carolina also closed briefly due to mandatory evacuation orders. In total, 16 of our hotels experienced some level of business impact from Hurricanes Harvey and Irma with our Houston, Dallas, Orlando and New Orleans hotels achieving higher than expected RevPAR for the quarter. And our hotels in Key West, Austin, Atlanta, Birmingham, Savannah and Charleston, South Carolina experiencing lower than expected RevPAR for the quarter. As Marcel noted, we are grateful for the dedicated employees at our properties as well as within our company who worked tirelessly and spent significant time away from their families as they prepared for, weathered and recovered from these natural disasters. As Marcel mentioned, our portfolio performance exceeded our expectations despite the calendar shift of the Jewish holidays into September and softer group business in the quarter as the short-term negative impact from Hurricanes Harvey and Irma was offset by increased post hurricane demand in Houston and stronger-than-expected performance in several markets. Same property RevPAR declined 1.3% comprised of decline in average daily rate of 2.2%, which was offset by occupancy which increased by 68 basis points. Group business was down approximately 1.6% for the quarter compared to last year, while transient and contract business decreased approximately 1.2%. Our top performing RevPAR markets during the quarter was Salt Lake City up 14.5%, Houston up 8.6%, New Orleans up 6.8 %, San Diego up 5.7%, Santa Clara at 5.6% and San Francisco up 5.5%. Hotel Monaco, Salt Lake City successfully implemented an aggressive transient strategy despite weak group production in the quarter. Our Houston hotels were impacted in late August by Hurricane Harvey, which disrupted operations in early September, but the remainder of September rebounded as demand increased throughout the city. Although as New Orleans benefited from strong group performance early in the quarter and strong transient activity at the end of the quarter. Hyatt Regency Santa Clara benefited from continued transient strength due to a robust corporate market and Marriott San Francisco Airport Waterfront performed well despite minimal compression from Downtown with the ongoing renovation of Moscone Centre. Our most challenged market for the quarter was Philadelphia due to a tough year-over-year comparison with the Democratic National Convention last year and several other city-wides that did not repeat this year. In addition, our hotel has been challenged with recently renovated competition and new competitive supply. Other markets that had notable declines were Charleston, West Virginia, Key West due to Hurricane Irma evacuation and the hotel's temporary closure. Chicago, and [Ivanhoe] where our hotel has been impacted by both new supply and recently renovated supply. We are pleased with our margin performance for the quarter as same property EBITDA margin was down just 16 basis points, despite a 1.3% decline in RevPAR. While our margins this quarter were aided by a reduction in real estate taxes has received the benefit of several significant reassessments. Real estate taxes year-to-date are now in line with our expectations and have increased 11 basis points. Despite flat RevPAR year-to-date, we've successfully grown our EBITDA margin by 19 basis points over last year. We continue to be pleased with our ability to control costs and increase efficiencies throughout the portfolio.

We also continue to be pleased with the momentum and results achieved through our property optimization process, which has been conducted at 7 hotels year-to-date and 24 currently owned hotels since the program started in 2014, representing approximately 65% of room count, approximately $5.5 million of ongoing annual net benefit.

As Marcel mentioned, we hope to achieve similar success at our newly acquired hotels, our scheduled news review is for Q4 of this year and early next year. We expect these reviews to have a positive long-term impact on margins across our portfolio, as we continue to identify revenue enhancement and cost containment opportunities. Turning now to our project management activities during the quarter. We spent $21 million in the third quarter and have spent $52 million year-to-date.

During the quarter, we completed meeting space renovations at Loews, New Orleans and Renaissance Atlanta Waverly and continued to make substantial progress on renovations at Westin Galleria in Houston. As you may recall, we finalized the renovation of the guest rooms at the hotel earlier this summer and are underway with renovations in the lobby, including the addition of a lobby bar as well as a transformation of the 24th floor meeting space which will include a new fitness center and club lounge.

This project was delayed due to Hurricane Harvey but we anticipate completing all of the work by early next year. Following the hurricane, we elected to move ahead with the guest room renovation at the Westin Oaks at the Galleria as planned to commence in the fourth quarter as we were able to secure qualified commercial contractors at pre-hurricane pricing and believe strongly that a fully renovated project will provide us with the right positioning in this competitive market is beginning to see signs of stabilization.

We are also about to begin guest room renovations this month at 6 additional hotels, each of which will continue through early 2018. While this a significant amount of work to be completed simultaneously, we're confident in our project management team's ability to successfully manage and complete each project and look forward to the positioning of our portfolio following the conclusion of these renovations. By the end of next summer, 2/3 of our rooms will either be new or have been fully renovated in the last 3 years.

We are confident that, as in prior renovations, we will be able to capture additional incremental market share and enhance guest satisfaction following these renovations. With that, I will turn the call over to Atish.

Thank you, Barry. I would like to discuss 2 items this morning. First, our balance sheet and second, our outlook for the remainder of the year and initial thoughts on next year. As to our balance sheet, we continue to be focused on having a strong balance sheet that allows us to execute on our growth strategy over time. We recognize that the strong balance sheet is necessary to be opportunistic as evidenced by our ability to close on 3 acquisitions in October.

Over the months ahead, we will focus on continuing to strengthen the balance sheet. Specifically, we intend to lower our leverage from its current level of approximately 4.2x debt- to- EBITDA, which is pro forma for our October acquisitions. Our goal is to have a sub-4x debt- to- EBITDA ratio by mid next year. Over the last several months, we have taken advantage of strong credit markets to obtain 2 new loans. We closed on $100 million variable-rate mortgage secured by the Renaissance Atlanta Waverly Hotel in August. Recall that our basis in this hotel is approximately $110 million. So we have effectively financed out our equity in the hotel.

The loan matures in 2024 and bears a low interest rate of LIBOR plus 210 basis points. Second, we closed on a new $125 million 7-year unsecured term loan. Subsequent to quarter-end, we fixed the rate on this term loan through September 2022. The effective interest rate on the loan based on our current leverage is approximately 3.8%. Our current mix of debt is about 75% fixed and 25% floating. Our maturities continue to be quite manageable with no maturities scheduled in 2018. In 2019, approximately $300 million of our debt matures, but each of the maturities has an extension option.

In addition, our fixed coverage ratio pro forma for our recent acquisitions is 5x , another indicator of the strength of our balance sheet. Now, I'd like to turn to our revised guidance that we issued this morning. Now that our guidance reflects the 39 hotels we own as of today. We raised our full- year 2017 guidance to reflect stronger- than- expected RevPAR growth and better-than-anticipated margin performance. Our third quarter came in ahead of our prior expectation and we expect the fourth quarter to do so as well.

This year has benefited from strong group business. In fact, our full year group revenue pace is up over 4%. On a same-property basis, we expect to earn $6 million more in adjusted EBITDA than we did when we last provided guidance. This $6 million is then offset by $3 million of anticipated negative impact in Key West and Napa due to the natural disasters that affected each market. Thus on a net basis, adjusted EBITDA is up $3 million. In addition, we are adding $8 million to reflect the earnings from the 3 hotels we acquired in early October.

As a reminder, these hotels earn nearly $35 million on a full- year basis. As a result of their seasonality, they are expected to earn approximately $8 million total in the fourth quarter. We raised our adjusted FFO guidance for the year to $215 million to $221 million, which is the result of the same factors I just mentioned. In addition, we expect each of interest expense and income tax expense to be slightly higher due to recent financings and the acquisitions.

We expect each to increase about $1 million relative to our prior guidance. An additional point to note related to our RevPAR guidance. We increased the midpoint of our full-year estimate by 100 basis points. A portion of the increase relates to the fact that the same property set has changed. As we noted in our earnings release, year-to-date RevPAR has increased 0.5% for the 39 hotel set on which our revised guidance is based. Year-to-date for the 36 hotel set that we reported on RevPAR, grew 10 basis points.

The other driver of RevPAR changes are revised expectation in Houston. We expect full- year RevPAR at our Houston hotels to be flat to down 2% in 2017. So still a decline, but much less severe than what we had expected 8 months ago. We are pleased with the stabilization of the Houston market that has resulted from the increase in demand following Hurricane Harvey. We are hopeful for the future, but to recognize that some of the market demand that is filling select service hotels, may be short-term.

Turning to hotel EBITDA margins, you'll recall that we began the year expecting margins to decline approximately 150 basis points. We currently expect hotel EBITDA margins to increase slightly. We've been able to maintain margins by working with our operators to find opportunities for increased efficiency at our hotels. Let me now turn to some initial thoughts on next year. As you know, our hotels are very much in the budgeting process. We have heard some of the larger operators provide initial thoughts on RevPAR outlook. It's too early to know how our hotels will compare to those much larger sets.

Overall, we continue to feel good about our markets on a relative basis. We do not have much gateway city exposure and have no hotels in several of the markets, which are experiencing high levels of supply growth such as New York City, Miami, Los Angeles, Nashville and Seattle. We expect supply growth in our markets to tick up from this year, driven by supply growth in markets such as Portland, Savannah, Philadelphia and Denver. Overall, we expect it to be in the approximately 3% range on a weighted basis next year and about the same in 2019.

One of the indicators that we do have for next year is group pace. We have approximately half of our business for 2018 on the books as of now. Our group revenue pace is up in the low single-digit percentage range. We are hopeful that similar to 2017, this group pace will sustain throughout 2018. As Barry mentioned, we have significant renovation works beginning in the fourth quarter that will continue through the first half of next year. We have -- also have several additional projects slated to begin in 2018. We' re excited about the improvements throughout the portfolio. We have scheduled and paced the renovations to minimize revenue disruption, but we believe that renovation-related revenue disruption will be similar, if not higher than that experienced in 2017.

As we look ahead to 2018, we are hopeful that the Key West market will have recovered. At this point, we expect that revenues in the Napa market may still be negatively impacted into 2018. Turning to margins, again it's too early to make specific comments, but what we can say is that we've been pleased by the level of margin growth we've seen this year. Year-to-date we have grown margins and this is on top of margin growth through the first 3 quarters of 2016. Going forward, it will be more challenging to maintain or increase margins in a low RevPAR growth environment. Several factors are increasingly coming into play, including the tightness in the labor market, the high levels of occupancy across our portfolio, higher property taxes and less opportunities for asset management initiatives. One other point to note is that the seasonality of our earnings has changed due to the portfolio changes that we have made this year. We expect that the first quarter will have a much higher share of our full year earnings than in the past. At present, our hotel EBITDA mix pro forma for all 2017 transactions is approximately is follows, over 25% in the first quarter, nearly 30% in the second quarter and in the low 20% range for each of the third and fourth quarters.

That concludes our prepared remarks this morning. We'll now open up the call to questions. Rachel maybe please have our first question.

(Operator Instructions) The first question comes from Jeff Donnelly with Wells Fargo.

Actually I guess maybe Marcel, just want to kick off with a question for you. Is it a move the past few years to divide the CEO and Chairman roles. I was just curious what kind of drove the decision to naming you its Chairman versus maybe another individual on the board. I guess, I was wondering, this is the catalyst maybe just another board member looking to reduce their role?

It certainly wasn't necessarily a board member looking to reduce their role. The board felt it was just an appropriate time to elevate me to the Chairman position based on the fact that we have a history as -- for 3 years as a public company here. We clearly have a history that I personally have us leading this company for last 10 years. So it is something where the board felt it was appropriate for me to now lead the company also as the leader of the board. So that was a decision that the board made and obviously in conjunction with we made the switch to elevate Barry and promote Barry to the present position, which we felt he was very, very well deserved and as you know our company, it's something where I'am particularly proud of our overall leadership team here including Barry, Atish and the rest of our executive team here. So I think, it's a good move for the company overall and that's what [drove that].

Understood. No, just curious if there is some bit more to it. Maybe just to switch gears, I actually just had a question for Barry and concerning Key West and Napa. You touched on this in your remarks, but both of those markets are kind of coping with I guess, I'll call it a rebuilding process. What's your take on that? I guess specifically how they ramp back. Do you think Key West, I guess, what I will call snow bird season is favorable at this point? I mean, do you think the headlines are maybe damaging their ability to recover in winter and what are they doing and I guess similar -- in a similar vain about Napa, maybe talk about where you kind of see their peak season and is being talked about certainly with sort of the level of damage that we heard about from the Caribbean. But I guess now that sort of the fires have passed, I guess, I'm just wondering, how extensive it is discussed and how does it kind of affect leisure demand in your view?

Great, quick question obviously. Certainly the new cycle has not been our friend in the hospitality and particularly as it relates to our particular assets. The more damage -- extensive damage is shown whether it's at or adjacent to our properties, it's clearly been challenging. And reality is that we had very little damage on a relative basis in Key West and other than smoke damage really, no damage at our properties in Napa. To the point of the question, though. We continue to be impressed with how rapidly each of those markets is recovering. Starting from a standstill, obviously Key West, we had our revenue levels grew literally every day through October. We had a very successful second weekend of fancy fest. In fact, we beat last year's results over that weekend. And continue to see improved performance in November. You'll recall that when the storm first happened in Key West, the [CVB] there actually kind of discouraged people from coming back in October at all. So we're hopeful and based on our transient bookings, we're certainly seeing, things recover more quickly. Key West is definitely open for business. The Wall Street is the same as it always has been, and we think that perhaps even in the very near term, we're getting some benefit by having all of our rooms open, while there are still some property out of inventory. Napa is a little bit different. The reality is that the fires didn't make it really anywhere close to our 2 hotels, the Marriott or the Andaz. But certainly there is a perception that again based on kind of news reports and television in particular that whole areas of the Napa Valley were completely burnt out. The large, large majority the wineries are open and operating. The town of Napa is working on some aggressive campaign to bring people back. And again, we're seeing transient leisure business improve week over week. What I think is also important to note is that with that leisure demand, clearly people are looking for activities to do and the activities they want to do are there. Our biggest impact, we think in Napa is behind us certainly. September and October are our strongest months there. So we've already had and kind of accounted for what we think are the weakest parts. The November, December, January time frame there seasonally, is actually our weakest kind of 3 consecutive months there. So we're hopeful we will make it through that and then we come out of it in Napa with a very robust spring moving forward.

That's useful and then maybe just 1 last question on Houston. Obviously, there has been a lot of discussion around the possibility of [preserving an] extended benefit that accrues from the damage from Harvey down in Houston. When you kind of think about that for the market, I guess, how much of that really relates to whether it's elimination of supply, call it temporary elimination of supply or sort of temporary demand whether it's from displaced homeowners or emergency utility crews. I am just trying to think about how long that sort of benefit could last in that market? And I guess maybe related to that, did either of your West didn't see any kind of pickup from for the Astros taking it out for the World Series?

So yes, there's been a lot going on in Houston obviously. And we've kept a very careful eye on it. We did get some World Series lift at the Westin Oaks and Galleria. Really no lift -- no World Series lift in the Woodlands. But the market is strong right now. And the market has really taken on a lot of different characteristics. Our hotels certainly play differently in the market than a select service property would. Couple of reasons for that, one is the price point of our hotels and the type of business we do which is fairly heavily group focused means that we didn't necessarily have the opportunity to take large blocks of displaced guest or recovery type of business and that was intentional on our part. But again, we had significant group business booked into the hotels that other than the first week or two has been able to come to the market. So we have been the beneficiaries of compressed transient business in the market, as the market itself has lifted and as this transient has and this relocation and recovery businesses has been there. We probably got a little slower start than some other properties in the market, just because we decided along with our management companies there to really kind of clear the decks, see what properties were out there and then aggressively go after the ones that we thought made best sense for us. But again, I think, our properties are -- will continue to perform very well in the market, but they will behave somewhat differently than some of the properties that are directly receiving relief in relocation business.

The next question comes from Thomas Allen with Morgan Stanley.

So Hyatt announced on their earnings call that they are going to [dispose the building] and half of assets, you've obviously been acquiring in the past. How you are thinking about that announcement?

Well, we are obviously very pleased that we were able to complete the transaction we did with Hyatt and as you know it was not our first transaction, we've done with them. We were able to do with the Hyatt Regency Grand Cypress earlier in the year. Few years ago, we bought 2 Andaz properties directly from them. We also bought Hyatt Regency Santa Clara in the past directly from Hyatt. So we clearly have a very strong relationship with them operationally and transactionally. So we will certainly continue to look at such opportunities there and I'm sure they'll do the right thing for their company, as far as how they're potentially marketing those assets and to the extent that they are appropriate fit for us. We will take a look at those type of things. And Atish pointed out that focus for us here in the short-term certainly is focusing on operations and making sure that our balance sheet remains very strong to be able to take advantage of opportunities when they're out there. So our main focus is making sure that we look to acquire assets that are good strategic fit for us in the long-term, and we feel very strongly that these transactions we've been able to complete within this year refit the box very well for us.

And then [some of] earnings season has been -- the online travel agency's results have been worse than expected. Are you seeing any traction with the direct booking push or any interesting trends as it relates to kind of your mix that help margins.

In general, our properties are not heavily rely on OTA business to begin with, obviously, we have a decent component of them, but this is -- we're not in the kinds of markets that see tremendous OTA business with the possible exception of [Ivanhoe] but we're certainly see -- we're seeing some beneficial shift out of OTAs and in the direct channels. That's certainly not what I think we thought it would be when the companies -- when the brands really started building the walls higher a couple of years ago. And certainly, we continue to be surprised by the overall volume of OTA business, which obviously continues to grow on an overall basis.

The next question comes from Will Crow with Raymond James .

Just picking up where Jeff left off on the disruption from the storms, can you talk about any labor or employee turnover issues that you're having in either Key West or Houston?

Yes, we've seen very little of that, I mean, really none in Houston, none in Napa. Key West has always been a fairly transient market and there are a small number of line employees that kind of left and haven't come back. But given how early we were able to get our hotel open and fully operational, we've had no issues in terms of identifying and hiring qualified labor.

And we also work with our management companies during some of these natural disasters to make sure that we put the right kind of plans in place to make sure that we would have the appropriate retention going forward. So some of that obviously hits the kind of onetime cost as a result of that, but we certainly benefited from that as it related to limiting the turnover at the hotels..

Great. I wanted to get your comments, Marcel, on Kimpton. It came up in an earlier call this earnings season that Kimpton was having some struggles with the integration into [InterContinental]. I'm just wondering what you're seeing at your hotels given that you've got such a high concentration.

Well, I'll kick it over to Barry here to talk a little bit more specifically about the operations in some of those assets. He has been very involved with discussions with Kimpton as it relates to the integration into IHG. We are actually hopeful that there will be some steps taken here in the short-term that should benefit the properties as there is a little bit more integration and there is some more integration of the rewards programs and those type of things. If you'd like to add anything to that, I think will be helpful.

Yes, I think, Marcel hit the most important points. I think, I would not suggest that it necessarily been [poorly] integrated, but certainly its been on a longer and more extending timeline than we would have liked overall, and we think it's really important to get the property management systems upgraded into the IHG platform that will certainly help with reservations. I think, the movement of the [condo] program into IHG rewards, we think will be beneficial in the long-term. And again, it's something that we think could have happened sooner. (inaudible) has a standalone rewards program by Kimpton own admission was not performing well over the last few years. But we think that if we can move ahead and they can really move ahead and get these pieces put in place in Q4 that we should have a much better setup in terms of how the guest perceives Kimpton, how they understand it's part of the IHG system and how we can move forward in terms of having a much more integrated technology platform with them.

And the other thing I'll add to that is that we wouldn't want to make any real blanket statements about the Kimpton assets in the portfolio, frankly, because we've had some assets that have performed well and there have been some assets that are little bit more challenged, which has largely been due to specific market conditions in some of those areas as well, but we certainly would -- we hope for the integration to play out as Barry just pointed that.

That's helpful. Finally from me, Marcel, both you and Atish, mentioned your desire to get your balance sheet get leverage levels down a little bit. Is that organic, is that assets sales, is that still an option at this point, or have you kind of extinguished your noncore assets.

Thanks, Bill. It's Atish. So I think, we said sub-4x by mid-next year, that's quite a ways from now and we've also -- we're not that much above 4x. So I think through the cash flow we generate, you can get some of the way there, if not all the way there. Obviously, we have other tools available to us. And we're past the bulk of what we wanted to do on the asset sale side, but we're active on the portfolio. We're always looking at opportunities, so that continues to be an avenue that is open to us. So I think those are the 2 components of how we would get there.

The next question comes from Brian Dobson with Nomura Instinet .

So just quickly touching upon what you just said on the portfolio, which markets are you most I guess most excited to get into over the next 2 years and which would you consider pulling back from?

Thanks, Brian. As far as markets we have looked to get into, I think we've always been pretty consistent in the way that we talk about that we'd like to be -- like having some balance among the top 25 U.S. lodging markets primarily and key leisure destinations . So we think that always gives us a little bit broader range of potential markets to look at as opposed to just saying, we have 4 or 5 target markets we absolutely have to get into. If you look at some of the top 25 markets that we're not in, we're not in those markets by design. There are reasons why we're not in markets that have high supply growth and they have significant labor pressures and all those type of things. So we don't feel like there is any specific blank spot that we absolutely have to go after. But if you look at what we did just over the last few months, we had exposure in Orlando, we had exposure in D.C. We certainly didn't feel like we were over-exposed in either one of those markets, so that gave us an opportunity to look for some good opportunities in those markets. A market like Phoenix, it was a market that we had looked at and said, we don't have any exposure here now. We do have history in the market. We know the market well. And this was a very good opportunity for us to enter that market. So that's the way we'll continue to look at opportunities. We're going to be pretty opportunistic as we look at markets on the acquisition side. And as it relates to the disposition side, it's going to be to Atish's points. A lot of the heavy lifting is done on disposition , but clearly we want to manage our balance sheet, we want to have flexibility on our balance sheet. We think, we are certainly not overextended as it relates to our debt levels right now. We've got a great balance sheet as we sit here, but we may want to look at some additional dispositions to just create some additional dry powder going forward for opportunities. And the thought process there will be similar to what we've always had, which is look at the market, look at assets, look at what CapEx needs are potentially in certain assets. Is it a correct ROI to get -- to make that additional investment or is it potentially time to sell out of those. So I hate to pinpoint specific assets or as you know, we don't really comment on those until it comes to fruition, but that remains the overall philosophy.

This concludes our question-and-answer session. I would like to turn the conference back over to Marcel Verbaas for any closing remarks.

Thank you, Rachel. Thank you everyone for your questions and continued interest in Xenia. And we look forward to seeing many of you at (inaudible) in Dallas next week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.