Xenia Hotels & Resorts Inc (XHR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Xenia Hotels & Resorts, Inc. Fourth Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Lisa Ramey, Vice President of Finance. Please go ahead, ma'am.

Thank you, Keith. Good morning, everyone, and welcome to the fourth quarter and full year 2017 earnings call and webcast for Xenia Hotels & Resorts. I'm here with 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 an overview of our 2017 achievements and fourth quarter and full year operating results. Barry will follow with additional details on our portfolio results and operational highlights as well as a detailed discussion of our capital expenditure projects, and Atish will conclude our remarks with a discussion of our 2018 outlook and recent balance sheet progress. 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 could 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, February 27, 2018, 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. Good morning, everyone, and thank you for joining our call. While 2017 brought us challenges, particularly with a variety of natural disasters impacting the country in general and our portfolio in particular, we were pleased to finish the fourth quarter and the full year ahead of our expectations and once again with a higher-quality portfolio than where we started the year. As promised, we remain focused on improving the quality of our portfolio through transactions and portfolio enhancement that furthered our strategy of primarily owning luxury and upper upscale hotels in top 25 U.S. markets and key leisure destinations. We continue to believe we are positioned well for the future, as our capital allocation decisions have positioned us to take advantage of both internal and external growth opportunities.

Our geographic diversity served us well in 2017, and while supply is increasing in many markets around the country, the average supply growth in our markets continues to be more favorable than what many of our peers are experiencing. As a result of our transaction activity over the past year, not only has the overall quality of the portfolio improved but so has the long-term growth profile and supply growth picture. Through our completed transactions, the estimated weighted average supply growth in our market tracks was reduced to 3% in 2018, a decrease of 50 basis points compared to our prior exposure.

We completed over $825 million of transactions in 2017, consisting of 4 acquisitions totaling approximately $615 million and 7 dispositions for a total amount of $212 million.

We completed the acquisition of Hyatt Regency Grand Cypress in Orlando in May and the purchase of Hyatt Regency Scottsdale, Royal Palms Resort & Spa and The Ritz-Carlton Pentagon City in October. We were pleased with the pricing and execution of each transaction as we were able to add 4 high-quality assets at an approximately 11x 2018 expected EBITDA multiple, very attractive entry points in today's acquisition environment. We finished the year with continued optimism about these hotels from an operational perspective. The hotels have collectively exceeded our initial underwriting expectations and our thesis regarding the potential upside that we expect to harvest from these acquisitions remains intact.

As we have previously discussed, we also executed a number of strategic disposition transactions in 2017, selling 7 hotels that did not fit the long-term hold criteria for our portfolio. The quality of the asset, its location and near-term capital requirements were factors that played a role in each disposition decision we made. As announced in our earnings release this morning, in the fourth quarter, we entered into an agreement to sell our leasehold interest in Aston Waikiki Beach Hotel for a sale price of $200 million, representing a 12.6x multiple on 2017 hotel EBITDA. The transaction is expected to close in the next few weeks and is subject to customary closing conditions.

We acquired the hotel in early 2014 for $183 million, and expect to realize a double-digit unlevered IRR during our 4 years of ownership. Through the sale of Aston Waikiki, we will reduce our pro forma corporate leverage to 3.7x net debt to EBITDA. Our leverage profile, debt maturity schedule and debt mix will provide ample flexibility to continue executing on our investment strategy as opportunities arise.

Additionally, after this disposition, approximately 95% of the rooms in our portfolio will be in the luxury and upper-upscale chain scale segments. These segments are a clear strategic focus and where we believe we can effectuate the most significant incremental results through our asset management approach. In our first 3 years as a publicly listed company, we executed over $1.6 billion in transactions, nearly 1/2 of our total enterprise value. We have traded lower-quality assets with more limited upside potential for high-quality institutional assets with enhanced growth opportunities.

Our pro forma portfolio, which excludes Aston Waikiki, ended 2017 with RevPAR of $161.14, which is nearly 20% higher than its 2014 RevPAR over the portfolio we owned at the time of our listing. I will reiterate again that we don't view RevPAR as the only metric when determining portfolio quality. However, it is one simple way to demonstrate the improvements we have made to our portfolio over the past several years without venturing into challenging markets like New York City to increase our average RevPAR just for the sake of doing so.

Now let's move to our fourth quarter and full year results. Fourth quarter results exceeded our expectations despite the negative impact the California wildfires had on our assets in Napa and Santa Barbara and the lingering impact of Hurricane Irma on the Key West markets. RevPAR and adjusted EBITDA both came in above the implied fourth quarter guidance range provided in November. During the quarter, we had net income attributable to common stockholders of $9.7 million. Adjusted EBITDA was $68 million and adjusted FFO per share was $0.52. Our same-property portfolio RevPAR grew 4.4% in the fourth quarter, with October up 5.7%, November up 4.1% and December up 2.7%.

In October, a series of wildfires in Northern California impacted both of our Napa hotels. Andaz Napa remained open throughout the month of October, while Marriott Napa Valley Resort & Spa was closed to guests for a week. The market experienced a decline in demand due to the overall conditions in the area. We continue to evaluate the business lost as a result of these fires, which could be covered by our business interruption insurance. Because of the wildfires, we anticipate operating performance at the hotels to be impacted into 2018, as business levels slowly return to normal.

Then in December, the Thomas Fire in Southern California affected our Canary Hotel in Santa Barbara. We were fortunate that our hotel did not experience property damage but the overall market struggled, as access and overall conditions were impacted because of the fires. This market continued to be impacted into 2018 as substantial mudslides affected the entire area. However, despite these disruptions and the aforementioned continued weakness in Key West, our portfolio outperformed our expectations. This was largely due to outperformance in Houston as the lodging market benefited from increased demands after Hurricane Harvey as well as strong performance in a number of our primary markets, as Barry will detail shortly.

For full year 2017, we had net income attributable to common stockholders of $98.9 million. Our same-property portfolio, including Aston Waikiki, boasted a 2017 RevPAR of $159.90, which represented 1.4% growth over last year.

Our pro forma portfolio, which excludes the Aston Waikiki, grew RevPAR by 1.9% over last year. Our adjusted EBITDA of $270.3 million was above the high end of the range we provided in November, and adjusted FFO per share was $2.06. As in prior periods, we were particularly pleased with our expense controls in the fourth quarter and for the full year. We grew same-property hotel EBITDA margin by 111 basis points in the quarter, resulting in margin improvement of 52 basis points for the full year.

We believe this is an impressive result when combined with our 1.4% RevPAR growth. While the composition of our portfolio has changed, it is worth mentioning we have been able to improve margins each of the 3 years since our listing despite negative RevPAR growth in 2016 and modest RevPAR growth in 2017. We believe this is reflective of the effectiveness of our asset management platform overall and our property optimization process in particular.

In addition to the transactions I discussed earlier, we continued to deploy strategic capital into our existing portfolio by completing several renovations throughout the year and commencing several guest room renovation projects in the fourth quarter. For the full year, we spent $86 million across the portfolio, including completed guest room renovations at Westin Galleria Houston, Andaz San Diego, Bohemian Hotel Celebration and Bohemian Hotel Savannah. In the fourth quarter, we commenced guest room renovations at 7 of our properties, all of which we anticipate completing in the first half of 2018. Barry will provide more detail on these projects later during the call.

As mentioned in our release this morning, our projected CapEx range for 2018 is $115 million to $135 million. While this is an increase over the past several years, it is strategic and consistent with what we have outlined previously as we accelerated several renovation projects in 2017 and 2018 to take advantage of the current low RevPAR growth environments. Additionally, a portion of this increased amount is directly attributable to our recently acquired Hyatt Regency Grand Cypress. Specifically, the guest room renovation and the planning and commencement of construction of the new 25,000-square-foot ballroom, which were contemplated in our initial underwriting of the property and communicated upon our acquisition of the hotel.

We are focused on positioning our portfolio through capital investments for stronger growth in the future. While these renovations will create an anticipated headwind in 2018 of approximately 75 basis points, we believe the investments made in 2017 and 2018 will enable our portfolio to compete more effectively and likely outperform in the future.

As we look ahead to 2018, we remain cautiously optimistic about industry fundamentals. While we are hopeful that tax reform and overall economic strength will drive increased corporate demands and translate into improved RevPAR growth and profitability, we are mindful of the impact of increases in supply we are seeing in the lodging industry and the lag that appears to exist between corporate profitability and increased lodging demands.

We are also mindful of cost pressures that impact our business. However, we remain confident that our geographic mix and our continued focus on cost controls will help us maintain and potentially grow profitability in a low RevPAR growth environment. We will continue to remain focused on these expense controls, aggressive asset-management initiatives and other factors that are in our control. Barry will now provide additional color on our operating performance, margin opportunities and capital expenditure initiatives.

Thank you, Marcel. As Marcel mentioned, our portfolio performance exceeded our expectations, aided by the calendar shift to the Jewish holidays, post-hurricane demand in Houston and stronger-than-expected performance in several markets. As a reminder, our same-property portfolio consists of the 39 hotels we owned at year-end. Note that this includes our hotels in Key West and Napa despite significant weather-related disruption and closures during the quarter and the year. Additionally, we included disclosure on our pro forma 38-hotel portfolio, which excludes Aston Waikiki, which is in our contract to sell in the first quarter in order to provide a clear understanding of the seasonality of our portfolio going forward.

Same-property RevPAR increased 4.4% for the quarter due entirely to an increase in occupancy as ADR remained flat. Revenue from group business was up approximately 12% in the quarter compared to last year, while transient and contract business revenue increased approximately 3%. As a result of our recent acquisitions and dispositions, group business now accounts for approximately 33% of our business mix. Our best-performing markets for the quarter were Houston, with RevPAR up 16.28% despite renovation headwinds; New Orleans, up 14.9%; Dallas, up 13.9%; San Francisco, up 12.1%; and Salt Lake City, up 11.8%. 18 of our 25 markets showed RevPAR growth for the quarter, 12 of which were above 5%.

As I mentioned, Houston benefited from post-hurricane demand, and our hotels were able to drive rate as we had strong group business during the quarter. New Orleans and Dallas benefited from strong citywide demand during the quarter and strong in-house group business as well. Napa and Santa Barbara struggled in the fourth quarter as a result of declines in business related to their respective wildfires, each down 13%. Key West continued to be challenged following Hurricane Irma in September as the market continued to demonstrate weakness, with our hotel down nearly 12% in the fourth quarter. We estimate that the EBITDA impact from lost business in Key West and Napa was approximately $3 million in the fourth quarter, and looking ahead, we expect business levels in these markets to be impacted well into 2018.

For the full year, our strongest markets were Salt Lake City, with RevPAR up 15.2%; Charleston, South Carolina, up 11.8%; Birmingham, up 9.1%; Napa, up 7.9%; Washington, D.C., up 6%; and Atlanta, up 5%. 16 of our markets had positive RevPAR growth in 2017, including Houston, which ended the year up 0.9% as compared to our most recent guidance of flat to down 2% provided in November. Philadelphia was our most challenged market in 2017, down 10.4%, following a strong 2016, which included hosting the Democratic National Convention. Charleston, West Virginia, Oahu, Chicago and Key West also struggled year-over-year.

We continue to be pleased with our margin performance as has been the case throughout the year. For the quarter, same property EBITDA margin grew 111 basis points, largely due to improvement in our food and beverage margins, which was attributable to a better catering and banquet mix. All operating departments experienced improved margins for the quarter. For the year, our same property EBITDA margin grew 52 basis points on 1.4% RevPAR growth as a result of strong food and beverage margins and effective cost-control measures implemented across the portfolio. We were able to minimize expense growth to only 0.7% for the year despite increases in real estate taxes and management fees. We're obviously very pleased with the expense controls we were able to maintain throughout the year. Our asset management team is doing a terrific job digging into our newly acquired assets, which are incrementally more complex than the assets that we sold. This added complexity will provide us with even greater opportunities to identify means by which we can enhance revenues and contain costs.

During 2017, we completed reviews at 10 hotels through our property optimization process. We identified $2.4 million in potential net benefits across these properties. We have now completed POPs at hotels, representing 73% of our portfolio. These reviews continue to be successful and certainly contributed to our ability to maintain margins in this low RevPAR growth environment. We have now implemented over $6.3 million in ongoing net revenue enhancements and expense reductions since the program started in 2014. Our internal POP team is now returning to a number of complex properties that were initially visited 3 or 4 years ago. We continue to be impressed with our ability to identify opportunities for improvement with the efforts of our property management teams in implementing them.

I would now like to turn to a review of our capital projects and major renovations completed and commenced last year. We spent approximately $34 million in the fourth quarter and $86 million during the year on capital expenditures and are extremely pleased with the improvements we made throughout the portfolio. In 2017, our most comprehensive renovation occurred at Westin Galleria Houston, which consisted of the completion of the guest room renovation, including the creation of 18 dedicated suites from 36 interior guest rooms, and the commencement of our major lobby renovation, including the addition of a lobby bar. Additionally in 2017, we began the transformation of the 24th floor meeting space, including an upgrade of the primary meeting space and the addition of a new fitness center and concierge lounge.

In addition to guest room renovations at Andaz San Diego, Bohemian Celebration and Bohemian Savannah, we also completed meeting space renovations at Marriott San Francisco Airport, Loews New Orleans, Renaissance Atlanta Waverly and Hyatt Regency Santa Clara. As you will recall, we made a very conscious decision to accelerate a number of rooms' renovation projects into 2017 and 2018 in anticipation of somewhat softer growth environment. These renovations will allow our hotels to maintain and enhance our competitive market positioning as these generally include significant bathroom upgrades, specifically tub to shower conversions.

Our large capital spend in the fourth quarter was due to the commencement of guest room innovations at Westin Oaks at the Galleria, Hilton Garden Inn Washington, D.C., Lorien Hotel & Spa, Hotel Monaco Denver, Residence Inn Denver City Center, Andaz Savannah and Marriott Chicago at Medical District/UIC. Each of these projects is on budget and on track to be completed in the first half of 2018. In total, we anticipate spending between $115 million and $135 million in capital expenditures in 2018, a year-over increase due largely to the $30 million we'll spend to complete the guest room projects that were started in Q4 of 2017.

We've scheduled a guest room innovation project at Marriott Dallas City Center during the second and third quarters of 2018, commencement of the guest room project at Hotel Monaco Chicago during the fourth quarter of 2018 and substantial meeting space renovations at Westin Galleria Houston and Marriott Woodlands Waterway Hotel & Convention Center in the second and third quarters. Additionally, we will complete renovations and reconceptings of the primary food and beverage outlets at Hotel Monaco Chicago and RiverPlace Hotel in Portland.

We expect to see significant performance improvements from our guest room renovations as they're completed. Looking across our 8 major guest room renovation projects completed between March 2012 and May 2016, RevPAR increased on average 20.2% from the trailing 12 months prior to the renovation to the trailing 12 months calculated at the 15-month mark following the renovation. Over the same period, our STR index increased an average of 6.9 points, highlighting the ability to significantly outperform our competitive sets following renovations of this magnitude. It is also evidence of our success in allocating capital to those assets where we believe capital expenditures will result in superior post-renovation performance and returns.

Finally, our renovations at Hyatt Regency Grand Cypress are scheduled to begin in 2018 and are expected to run through 2020 in various stages and with minimal disruption. First, this summer, we will renovate all of the guest rooms at the hotel, including the 36 newly created suites. By year-end, we expect to begin construction on a 25,000-square-foot ballroom, with 30,000 square feet of ancillary pre-function and support space. We believe that by adding this additional ballroom, the property will benefit greatly and the property will provide a strong return on investment. This expansion will allow the hotel to increase and better balance group bookings within its dynamic market and enable it to compete more competitively, more effectively, going forward.

When the new ballroom is complete, we will then renovate the hotel's existing meeting space and then turn our attention to a wide variety of potential additional ROI projects to an excess land that we control.

With that, I will turn the call over to Atish.

Thank you, Barry. I will cover 2 topics today. First, I will discuss our 2018 guidance, and then I will turn to a discussion of our balance sheet progress over the last year. I will begin by discussing our adjusted EBITDA and FFO per share guidance. As a result of our transaction activity and recent renovations, we anticipate both adjusted EBITDA and FFO per share to grow in 2018. We expect our adjusted EBITDA to be between $281 million and $295 million in 2018. Transaction activity and post-renovation lift are the key drivers to our earnings growth. Given how active we've been on the transactional front, I want to provide a detailed walk of these relative to the midpoint of our 2018 guidance.

The 4 hotels that we acquired last year are anticipated to contribute approximately $40 million more in EBITDA relative to what they contributed in 2017. This is somewhat offset by disposition activity. The 7 hotels that we sold last year contributed approximately $9 million to our 2017 adjusted EBITDA. In addition to this, our guidance reflects the pending sale of the Aston Waikiki Beach Hotel. This hotel contributed approximately $12 million to our 2017 adjusted EBITDA net of $3.4 million of general excise tax expense for our ownership of the hotel from 2014 to 2017. We expect the Aston Waikiki to contribute between $2 million and $3 million to our adjusted EBITDA during our ownership period in 2018. Adding together the completed transactions and the pending sale of the Aston Waikiki, the net pro forma EBITDA increase from transactions since the beginning of 2017 is approximately $21 million at the midpoint.

The majority of the net $21 million is expected to be realized in the first half, owing to both the timing of the transaction activity as well as the relative seasonality of the hotels that we acquired compared to those that we sold. To complete the walk from 2017 to 2018, there are 2 offsetting factors. One is slightly lower expected adjusted EBITDA from the remainder of our hotels, and I'll talk more about this a bit later, and the second is slightly higher G&A expense relative to 2017.

In total, these 2 items reflect approximately $3 million of EBITDA, so this brings us to an expected total year-over-year increase of $18 million to adjusted EBITDA at the midpoint of our guidance. Moving ahead to adjusted FFO, we are currently projecting to earn between $222 million and $236 million. This results in $2.08 to $2.21 per share of adjusted FFO based on 107 million shares outstanding. This represents over 4% growth in adjusted FFO per share as compared to 2017. That reflects the higher adjusted EBITDA that I just discussed to offset by an increase in interest expense due to new loans as well as higher rates.

Moving ahead, I will now discuss our thoughts on RevPAR growth. From a top line perspective, RevPAR is expected to be flat to up 2% in 2018. Difficult comparisons and greater revenue displacement from renovations are expected to adversely affect RevPAR growth in 2018. As to comparisons, they will be especially tough for us in a couple of markets. In Houston, the comparisons will be difficult due to the Super Bowl and post Hurricane Harvey lift last year. In Washington, D.C., the first quarter will see a difficult comparison due to the inauguration and Women's March in 2017.

As to renovations, we expect more revenue displacement in 2018 than we experienced in 2017. While we had less than 50 basis points of impact last year, we expect 75 basis points of negative impact to RevPAR in 2018. We will see the greatest impact in the first quarter as approximately 15% of our guest rooms are under renovation. This is expected to result in approximately 200 basis points of impact. During the second and third quarters, we will see less impact, and in the fourth quarter, we will be lapping an easy renovation comparison to the fourth quarter of 2017, so the impact will be relatively minimal.

I would like to turn to the first quarter to put a little bit finer point on that. Given the comparison and the renovation displacement issues that I just spoke about, RevPAR year-to-date through February declined approximately 3.5%. Our expectation is that first quarter RevPAR will decline approximately the same or about 3.5%. These 2 factors, tough comparisons and renovations, have limited our group revenue pace to last year. While 70% of our group -- budgeted group business for 2018 is definite, revenue pace is approximately flat.

Moving ahead, I will now discuss our hotel EBITDA margin expectations. From a margin perspective, it continues to be challenging to grow margins with only slightly positive RevPAR growth. At the operating level, we continue to conduct property optimization reviews and find portfolio-wide initiatives to offset cost increases in order to maintain margins. But in part due to certain increases in nonoperating costs, we expect margins to decline approximately 40 basis points. These costs include property insurance and taxes. We expect property insurance expense to increase approximately 5%, and we expect property tax expense to increase approximately 6%, excluding any benefit from refunds in 2017 or 2018.

Now I would like to move to my second topic, our balance sheet. We were active on this front in 2017, originating 2 mortgage loans and an unsecured term loan. We also paid off or repriced 4 other loans. Overall, we ended the year with a net debt to EBITDA ratio of 4.2x per our line of credit definition. To date in 2018, we have continued some momentum and made further strides to strengthen our balance sheet. In January, we extended our line of credit. We now have $500 million of capacity, all of which is undrawn. This additional capacity provides flexibility for us. We also closed on a new $65 million mortgage loan secured by The Ritz-Carlton Pentagon City and paid off a $18 million mortgage loan on Hotel Monaco Chicago. Pro forma for these transactions as well as the sale of Aston Waikiki, our net debt to EBITDA will decline by 1/2 a turn to 3.7x. This leverage level positions us well for future transactions should we find any that fit our criteria.

We have well-staggered debt maturities, with no maturities this year. Each of our 2019 debt maturities has an extension option. In addition, our balance sheet is strong. We have 21 unencumbered assets and our fixed coverage ratio pro forma for our debt financings and the Aston Waikiki sale is 4.5x.

That concludes our prepared remarks. Keith, at this time, will open the call to questions.

(Operator Instructions) And the first question comes from Thomas Allen with Morgan Stanley.

There's been some debate around the Houston market, just around what the outlook is for 2018, how long the displacement business is going to stick around. How are you guys thinking about that?

I'll start it off and then we'll have Barry jump in here shortly but, overall, we felt that as we've kind of saw throughout last year, conditions were starting to strengthen in Houston overall and then obviously after Harvey, there was a lot of incremental demand that was generated and a lot of compression that was happening in the market. We're obviously very focused on our assets very specifically. We think that clearly the comparisons are difficult -- more difficult this year. We are not -- we were not the type of assets that necessarily benefited from the true kind of displaced resident type of demands. We are obviously the type of assets that are reliving by the transient, by the corporate demand and the group demand that's coming into our hotels. So we think that, just kind of the natural course of business, it's certainly strengthening in Houston. As it relates to our assets specifically, we expect to be flat to slightly negative this year just because the comparisons are very difficult going into this year and we are also dealing with some of this renovation impact as it relates to our assets, but we feel very strongly about these renovations that we've now -- that we're kind of in the middle of completing at this point and having a product that's going to compete very effectively there going forward. So anything to add there, Barry?

Yes, as we look at last year, we had very good group on the books for Q4 in Houston, so that actually kept us from taking on some longer-term kind of refugee or displacement-type business. We did benefit on the transient side from just general compression in the market, but as Marcel said, this certainly Q4 this year will be a very tough comp for the market overall. And as we look at kind of finishing up our renovation work toward the end of Q3, we think we'll have a good year. But given a lot of puts and takes related to Super Bowl not being there in '17 and not '18, our own revenue displacement due to the renovation work and then a really tough comp in Q4, I think we're looking for the real market strength to emerge kind of very late '18 and into early '19.

Helpful. And then Aston Waikiki, I mean, there's a lot of bullishness around Hawaii in general, so why did you choose to sell that asset?

Yes, obviously, we're still in the midst of completing the transaction, so we probably won't comment quite as much as we can after we complete the transaction. But that being said, we recognize that the overall Hawaii market has had a lot of interest and it's a market that overall is a market that's not seeing a lot of supply growth, which is not really a positive. In our particular situation here, it's an asset that competitively has been somewhat challenged because of the condition of it versus its competitors. We felt that actually this asset was particularly now that we've upgraded our portfolio as much as we have over the past few years is not a perfect strategic fit for us in the longer term, so the ability to actually take advantage of the opportunity to sell an asset during a time where the market is attracting a good amount of investment interest, we thought was an opportune time for us to transact on it.

And the next question comes from Jeff Donnelly with Wells Fargo.

In the fourth quarter and I guess full year 2017, you were able to deliver pretty healthy positive margin growth really despite a lack of ADR growth. I know you said in your remarks that F&B margins are more robust, expenses were contained, but do you believe those were moment-in-time efficiencies? Or do you think those could extend into 2018?

I think on balance, Jeff, we think those do extend. I think when you look at what we've accomplished in the last several years, we really spent a lot of time and had very good reception from the operators in really figuring out how to maximize the businesses. We've talked about before, we look at every revenue item. We continue to find lots of opportunities in ancillary revenue lines, whether that's rollaway beds, early departure fees, those kinds of things are obviously purely incremental profits. We've seen flow from those and we think we'll continue to see flow from those, but then on the expense side, not only have we gone through really expenses in each one of our properties, but we've found a lot of labor savings and a lot of labor efficiencies primarily in looking at how the hotels are staffed, how things move through the hotel, how housemen bring things up to the floors to housekeepers, how housekeepers work their days and how they're scheduled really matching the labor staffing in a hotel to demand levels on a day-by-day basis. It's -- I wish I could make it sound more magical than it is, but it's really just looking at the entire business operation and finding opportunities to really enhance revenues and contain costs.

Are you able to share, maybe Atish can chime in, just what did you guys build into your 2018 guidance or margins? Or did you kind of stay conservative on that front?

Well, as I mention in the prepared remarks, Jeff, our guidance implies a margin decline of about 40 basis points. And so if you -- and that was driven primarily by higher taxes and insurance. So if you were to adjust for the impact of those 2 items, really, we're talking about flat margins at the midpoint of 1% RevPAR growth environments. So obviously, we've got a certain level of built-in thoughts on finding opportunities for efficiency and limiting expense growth outside of those nonoperating areas that I mentioned. And, Barry, is there anything else you wanted to add to that?

Yes, I mean, when we look at overall netting all those, we're looking at, as opposed to 0.7% expense growth we achieved this year, we're looking in that midpoint of guidance of 2.1% expense growth next year.

That's useful. And maybe just one last question -- I hate to leave Marcel out -- is I'm not sure you'll venture a guess, but if a leasehold interest on the Aston went for 12.6x, what do you think a fee simple valuation would have been for that property?

I probably won't venture a guess on that, but obviously you know the terms of the lease as we disclosed. It is a 40-year remaining term roughly on the leasehold interest there. So we felt that this was an appropriate level of pricing in this type of transaction given the asset, given its leaseholds and given the remainder on the lease term.

And the next question comes from Bill Crow with Raymond James.

Back to Houston. The fourth quarter comps obviously going to be really tough. Is it tough enough that it brings your entire portfolio RevPAR into negative territory for that quarter?

I'll let Atish check whether that's actually correct or not, but what I will tell you is that we get the benefit next year of not having renovation in Q4, which we've had substantial renovation in the last 2 years. So we will have a lot more rooms to sell than we had in Q4 of '17, when he had the Oaks out, and Q4 of '16, when we had the Galleria out.

And as it relates to how it impacts the overall portfolio, I think Atish obviously outlined in his remarks where we have some more difficult comparisons, which is truly here in the first quarter particularly because of the fact that portfolio wise, we're lapping Super Bowl in Houston, we're lapping the fact that we had the inauguration in D.C. We've got a fair amount of renovations going on here in the first quarter, so we really view the first quarter as the most challenging quarter for us from a year-over-year comparison.

Yes, that's exactly right. Fourth quarter, we're expecting it to be positive in the...

Okay. I was just thinking if you're down 3.5 in the first and if the fourth was, call it, flattish, it implies pretty good growth in the mid part of the year. Marcel or Barry, are you surprised that Napa hasn't come back quicker?

Yes, I think a little bit, but really some of it is -- and we're seeing some disparate results between our 2 properties there. The Andaz has come back very quickly. The Marriott has been a little bit more challenged. Some of that is related to the fact that the Marriott does a lot more group business and a lot, quite frankly, is local kind of Bay Area-driven group business. We think the Napa CVB has done a very good job of promoting Napa, and we see it coming back slowly. But in the case of a hotel that is typically booking group business a few months out, which is the case there, it's just been a little slower to get that ramped back up.

Okay. And then finally for me, as I look across your portfolio, I think you mentioned you're at 85% luxury and upper upscale. Is that the comment? I'm just curious.

95%.

95%, okay. So, as we think about what you might sell going forward, should we think about that 5%? Should we look at some of the more generic maybe Marriott-branded properties, whether it's Charleston, West Virginia or you've got a number of what I would call more kind of typical assets that may not be a long-term hold. How do we think about what you might look to recycle?

Great question. Where we currently are, we've clearly -- and I said some of this before, but we've clearly done a lot of the heavy lifting as far as how we've transformed the portfolio and upgraded the portfolio. But we probably won't sit on our laurels and say this is it, and it's really going to be driven by what kind of acquisition opportunities we find too and what kind of opportunities do we see to continue to upgrade that portfolio. I think your point is valid to some extent on both comps. I mean, there are certain assets on the bottom end of the portfolio that we'll continue to look at, potentially dispose of longer term that's -- when you look at our portfolio now probably appeared to be a little less core for us than they may have been before, so there's certainly some of those assets. As it relates to the upscale assets that we still own, the 3 that we still own post the Aston Waikiki deal are the Residence Inn in Denver City Center, the Hilton Garden Inn Washington, D.C., downtown, and the Residency Inn in Cambridge. So even besides the names of those, you will recognize that those 3 are obviously in very urban high RevPAR environments and assets that do very well for us from a RevPAR perspective, from a EBITDA per key perspective and we believe that there's still some upside to be gotten from those assets. But to the extent that over time, we find more interesting opportunities in the upper upscale and luxury segments, we could certainly look at potentially cycling out some of those assets over the long term.

And the next question comes from Bryan Maher with B. Riley FBR.

Kind of on the flip side of that last question, what are you seeing in the depth of the market related to a pipeline of acquisitions? Is it getting smaller? Is it getting less expensive with the pullback in a lot of the REIT stocks? What are you seeing in that regard?

Bryan, I think it's not too dissimilar from what we've already talked about over the last few quarters. As far as what we see in the pipeline, I wouldn't say it's enormously robust. It's definitely a lot of work to try to find assets that fit the criteria that we're looking for at this point. So it continues to be a lot of work of trying to find deals through the brokerage community, through direct deals and trying to find those specific assets that we think are accretive to our portfolio. So I wouldn't say that it necessarily has gotten more difficult or less difficult over the last few months. As always, when REITs maybe pull back a little bit, there are other buyers that fill that void to some extent. Certainly, some other REITs have done some interesting transactions or announced interesting transactions recently, so I couldn't say that REITs are totally out of that business either at this point. But it continues to be a fair amount of work to find the right type of deals, but we're pretty confident that through all the relationships that we have that we'll continue to find those deals going forward.

And then on -- you talked a little bit about the labor efficiencies and moving stuff around the hotels and people around the hotels. How do you look at that versus what we continue to hear of higher wage and benefit costs? And at some point do the higher wage and benefit costs outweigh the benefits you're going to be getting on the efficiencies?

Thanks, Bryan. It certainly -- over time, those things clearly will meet at some point in any portfolio and even in our portfolio. I think cost pressure with regard to labor is certainly intense in most markets and we continue to look at and adjust wages and benefits in order to be competitive, and that's certainly true. We do have the -- we have a relative advantage, we think, of being in a lot of markets where labor is more plentiful on balance than it is in some other more concentrated urban markets, so there is a little bit of a deeper pool of people who are interested in working in hotels and working in markets and environments that offer competitive wages and great benefits so -- but certainly, there is a time when those will cross, and there's no question we're feeling the same pressures on wages and benefits as the industry is.

I'll just add to that, that we do feel that our geographic mix, to Barry's point, has helped us in that regard, to be able to maintain margins and increase margins in the kind of RevPAR environment we've been in. So, we've felt over the last couple of years and still feel that even that's somewhat muted RevPAR growth, we will be able to maintain those margins just because of some of our geographic mix versus some of our peers.

And the next question comes from Brian Dobson with Nomura.

Just a quick question -- well, 2 quick questions. First on guidance, does your guidance, I guess, include any allowance for strengthening economic trends or any improving group demand trends that other companies are seeing later in the year? Or is it appropriately conservative? And then just real quick on your ROI projects. What's the average hurdle rate on the projects that are being undertaken over the next 12 to 18 months and then longer term, you alluded to some property that could be developed. What would the hurdle rate be on that type of development?

I'll take the first question on guidance, Brian. I think the budget process obviously starts earlier, many months ago, but the guidance that we gave today really reflects our view of the outlook as of today, and I don't think there's any sort of conservatism or optimism built into the guidance. It's, frankly, our best estimate as to how the year is going to progress based on all the facts we know as of today. Certainly, higher levels of economic growth that might emerge due to the tax bill, I mean, that could translate into more optimism, but, frankly, we haven't built any -- all of what we know today has been incorporated into our guidance so that -- and the question on returns?

On the ROI side, on the projects that we are undertaking. Clearly, we strive to be prudent capital allocators in the way that we spend our variable resources. So when we look at doing these projects, as always in the hotel industry, some of the expenditures are defensive and some of them are maintenance. But really when you look at doing these projects, we're looking for low double-digit returns at least on these type of investments. So we certainly feel that those are achievable with the type of projects that we're undertaking here. And we -- as we've talked about quite a bit over the last year or 2, we always looked at '17 and '18 as 2 years where we'd have some increased expenditures because of some cycle renovations we're coming up with, but also just pulling in some renovations because we felt it was an appropriate time during a time where maybe demand wasn't going to be quite as robust and the RevPAR environment wasn't going to be quite as robust to really set us up for some outsized growth going forward. So that's what we're really continuing to execute on, so we feel very good about that. As it relates to the other thing that Barry mentioned as far as some of the additional ROI opportunities that might be at Grand Cypress, it's really too early to talk about some of those. We've identified when we went into the asset and did the acquisition, it was very clear to us that we felt there was a real benefit from doing a room renovation here this summer. We feel that there's real upside in doing this ballroom development that we've talked about, but we're intrigued by some of the additional land that we have available at the property where we may be to do some other things. That's really something we're going to have to work out as we continue the ownership of the hotel here and start analyzing some of them.

And as there are no more questions at the present time, I would like to return the call to Mr. Verbaas for any closing comments.

Thank you, Keith. Well, thanks, everyone for joining our call today. I'd like to just reiterate how delighted we were by our activity and results in 2017, in what was a pretty challenging environment. So we believe we were good allocators of capital during the year. We made significant progress in improving the quality of our assets, executing on the projects to enhance the long-term value of the company and positioning the balance sheet to once again be opportunistic going forward. So we look forward to sharing that progress in 2018 as we continue to execute against our strategy.

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