Xenia Hotels & Resorts Inc (XHR) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to the Xenia Hotels & Resorts Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Lisa Ramey, Vice President of Finance. Please go ahead.

Thank you, Andrea. Good afternoon, everyone, and welcome to the fourth quarter and full year 2018 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 Executive Vice President and Chief Financial Officer. Marcel will begin with an overview of our company strategy and discussion on our operating results. Barry will follow with more details about fourth quarter and full year 2018 results and details on our capital expenditure projects. And Atish will conclude our remarks with a discussion of our 2019 guidance and a review of 2018 capital markets activities. 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 in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, February 26, 2019, 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 this morning 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 afternoon, and thank you for joining the call. We are pleased to be able to discuss what we believe is a very successful fourth quarter and full year 2018 for the company in many regards.

But before I turn to specific achievements and results for the quarter and the year, I believe it's important and informative to revisit the pillars of our company strategy we laid out in detail at our Investor Day in May 2016 as we review our performance as a company and as a management team over the past several years.

The first pillar of our company strategy is a transaction-oriented mindset with a focus on diversification, quality and portfolio enhancement. Since well before our listing in February 2015 and continually so since that time, we have transformed our portfolio through transactions. Since our listing 4 years ago, we have not only continued to improve our overall portfolio metrics, such as RevPAR, EBITDA per key, geographic diversification and projected competitive supply increases, but most importantly, we have improved the growth profile of the company as we look to the future.

We have accomplished all of this through primarily single asset and small portfolio transactions. While the smaller deal size is less headline-grabbing than a large portfolio transaction would be, our execution has been strategic as it has allowed us to be thoughtful and methodical about each trade and enabled us to match our acquisitions with dispositions and smart capital allocation decisions.

Our transaction strategy has allowed us to buy assets at attractive pricing without the need to pay significant premiums for large portfolios or companies. Each of our acquisitions has been directly on strategy. As a result of our acquisition activity since our Investor Day, we have doubled our exposure to luxury hotels and resorts, up to 26% from 13%, and further enhanced our geographic and brand mix. We have acquired these assets at significant discounts to replacement costs. And most importantly, our acquisitions have provided us with significant opportunities to drive asset values through our asset management and project management expertise as we unlock revenue growth potential and identify expense efficiencies.

Meanwhile, our dispositions have focused on assets that generally shared one or more of the following characteristics: one, significant directly competitive supply additions; two, substantial near-term capital requirements without an appropriate projected return; three, hotel operations that we believe are at or near optimization from an asset management perspective; four, unfavorable ground lease terms; and/or five, assets that are not closely aligned with our strategy of owning uniquely positioned luxury and upper upscale hotels and resorts in top 25 U.S. lodging markets and key leisure destinations.

We continued executing on this transaction strategy throughout 2018 and during the fourth quarter specifically, and I will discuss the details of the 4 exciting transactions we completed during the quarter shortly.

The second pillar of our company strategy is an emphasis on a conservative leverage profile and a healthy balance sheet throughout various lodging cycles. Our net debt to adjusted EBITDA multiple has fluctuated from 3.1x to 4.2x since our listing in early 2015. We believe this to be an appropriate and conservative range for this part of the lodging cycle, especially when considering that we have no preferred equity outstanding.

Additionally, we have lengthened our debt maturity schedule, improved our mix of fixed and floating rate debt and further streamlined our balance sheet by now wholly owning all 40 hotels in our portfolio.

Through our capital allocation efforts in 2018, we ended the year at 3.6x net debt to adjusted EBITDA, over half a turn below where we began the year. At a time where the lodging REIT balance sheets range greatly from 1x to over 9x net debt to EBITDA, we believe our balance sheet is at an optimal level, providing flexibility to continue our portfolio enhancements should opportunities present themselves.

And lastly, aggressive asset management initiatives and leveraging our relationships with both brands and managers is the third pillar of our company strategy. We have some of the strongest relationships in the industry with the best brand and third-party management companies in the business. Through the continued evolution of our portfolio over the past 4 years, we have maintained a significant relationship with Marriott while expanding our relationships with Hyatt, IHG through Kimpton and Accor through Fairmont. We are excited to have also recently welcomed Hilton back as an operator of one of our hotels through the acquisition of what is now the Waldorf Astoria Atlanta Buckhead. We believe that our asset management initiatives and the expertise of the management companies operating our assets day-to-day drive optimal results at our hotels.

While the composition of our portfolio continues to evolve, we have been able to improve same-property hotel EBITDA margins each of the 4 years since our listing despite a same-property RevPAR decline in 2016 and modest RevPAR growth in 2017 and 2018.

We believe this is reflective of the effectiveness of our asset management platform overall and our property optimization process in particular. Over the past 3 years, we have completed 27 POPs, resulting in recommendations that have helped to drive meaningful improvements in revenues and expense controls. We look forward to continuing this successful program.

Now let's move to our fourth quarter and full year results. During the quarter, we had net income attributable to common stockholders of $100 million. Adjusted EBITDAre was $75.7 million, and adjusted FFO per share was $0.58. Our same-property portfolio RevPAR grew 1.6% in the fourth quarter, and our same-property hotel EBITDA margin increased by 47 basis points.

For full year 2018, we had net income attributable to common stockholders of $193.7 million. Our adjusted EBITDAre of $299.8 million was near the high end of the guidance range we provided in November. And adjusted FFO per share was $2.22, a 7.8% increase over last year and above the high end of the guidance range we provided for 2018 at the beginning of the year.

We are pleased to have provided this FFO per share growth in 2018 as we continue to focus on a balance between earnings growth and enhancing the quality and future growth profile of the company.

We continue to be pleased with our operators' focus on expense controls, as evidenced by our results in the fourth quarter and for the full year. 2018 marked another year of hotel EBITDA margin growth for our same-property portfolio, accomplished with a modest 1.2% RevPAR growth.

Total same-property operating expenses were only up 1.3%, resulting in same-property hotel EBITDA margin improvement of 5 basis points for the full year. We believe this is an impressive result in the current operating environment. We continue to work with our operators to find opportunities for efficiencies, and we are particularly pleased with the performance of our 2017 and 2018 acquisitions as we integrated each into our portfolio.

Our transaction activities in 2018 were a successful continuation of our focus on upgrading our portfolio. We were a net seller for the year, but only modestly so as our activities were relatively balanced between acquisitions and dispositions.

We completed nearly $800 million in transactions, including 4 acquisitions totaling approximately $360 million and 3 dispositions for a total of $420 million. We were pleased with the pricing and execution of each transaction. We added 4 luxury hotels to the portfolio and sold 3 lower-tier hotels, bringing our total portfolio mix based on room count to 26% luxury, 72% upper upscale and 2% upscale.

We have previously discussed the sale of Aston Waikiki Beach Hotel in the first quarter and the acquisitions of The Ritz-Carlton, Denver and Fairmont Pittsburgh in the third quarter. During the fourth quarter, we acquired 2 additional luxury hotels with significant upside potential and sold 2 select-service hotels with more limited growth opportunities from an operational perspective.

In November, we completed the acquisition of Park Hyatt Aviara Resort, Golf Club & Spa in Carlsbad outside of San Diego, California for $170 million or approximately $520,000 per key. This pricing represents a significant discount to replacement cost and to the prices paid for comparable resorts in the surrounding areas and nationwide in recent years.

As we detailed in our earnings release this morning, we anticipate spending between $50 million and $60 million at the resort over the last several years. Barry will provide further detail on our capital plans later in the call.

As many of you may know, the resort was built as a Four Seasons resort about 20 years ago, and as such, it is very well-built. The opportunity here lies with a lack of capital investment at the property over many years. We believe that the necessary cosmetic upgrades will allow the resort to regain its proper positioning and successfully compete with its competitive set once again, leading to significant increases in RevPAR and operating margins. We are excited to have acquired this high-quality asset located on 222 acres of fee-simple land and a desirable coastal California location.

We acquired the resorts through a competitive process and believe that our transaction experience and ability to underwrite thoroughly and expeditiously were determining factors in us being able to add this outstanding resort to our portfolio.

In December, we completed the acquisition of a 127-room luxury hotel in the Buckhead area of Atlanta for $53.5 million. Immediately upon completion of this acquisition, we rebranded the hotel as Waldorf Astoria Atlanta Buckhead and engaged Hilton as the operator of the hotel.

Simultaneously with this acquisition, we purchased a freestanding restaurant that is part of the same mixed-use development for $7 million. The restaurant is currently leased and operated as Del Frisco's Grille. As I mentioned before, we are excited to have added Hilton back into our portfolio as manager and believe strongly in the value that the Waldorf Astoria brand will be able to add to the asset.

While the hotel is in good physical condition, we intend to complete a number of ROI projects to further enhance the appeal of the property's food and beverage facilities and rooms product over the next couple of years. In 2019, our focus for this hotel will be on working with Hilton to optimize revenue and expense strategies.

Also during the quarter, we completed the sale of 2 of our select-service hotels, Hilton Garden Inn Washington D.C. and Residence Inn Denver City Center, for a combined sales price of $220 million, which equates to a 14.1x multiple on the blended trailing 12-month hotel EBITDA. We took advantage of strong private buyer interest in these 2 assets in markets where we recently added high-quality luxury hotels through the acquisitions of The Ritz-Carlton, Pentagon City and The Ritz-Carlton, Denver.

By selling the 2 hotels at attractive valuations, we further strengthened our balance sheet while effectively trading assets with what we believe to be more limited upside for assets with significant value-enhancement opportunities. Our focus is on unlocking the value potential of our hotels and resorts, which in turn should lead to greater RevPAR, margin improvement, higher EBITDA per key and FFO growth.

We believe that the hotels we added in 2017 and 2018 provide a significantly greater opportunity to increase value than the assets we have sold over the past few years. Meaningful top and bottom line improvement opportunities exist at the 4 properties we acquired in 2018 through a combination of capital expenditures, revenue optimization strategies and expense controls. It is worth noting that all 4 of the hotels we acquired in 2018 were previously owned by financial institutions that were not lodging-dedicated investors. Resultingly, we believe we have intriguing and ample opportunities to optimize operations at these assets under our ownership and through our strong relationships with Hyatt, Marriott, Fairmont and Hilton.

As outlined in our earnings release this morning, despite the many positive improvements we have made in our portfolio through our transactions and our well-received capital expenditures, we expect another year of relatively modest RevPAR growth in 2019 relative to 2018. This is primarily due to the current overall economic climate as well as elevated supply growth in many markets.

The midpoint of our guidance results in adjusted EBITDAre and adjusted FFO which are down slightly compared to last year. Our expectations for improved performance at recently renovated hotels and newly acquired properties are being offset by expense growth, resulting from higher wage and benefit costs and greater real estate tax and insurance expenses. Atish will discuss these factors in more detail shortly.

We continue to be excited about the long-term growth opportunities embedded in our portfolio. As a result of the recent moves we have made as well as our strong balance sheet, we believe the company is well positioned for earnings growth in the years ahead.

With that, I'll turn the call over to Barry.

Thank you, Marcel. As a reminder, all of the portfolio information I'll be speaking about is reported on a same-property basis for the 40 hotels owned at year-end, which includes our 2 fourth quarter acquisitions.

Same-property RevPAR grew 1.6% for the quarter, driven by a 2.5% increase in ADR as occupancy declined by 62 basis points. Food and beverage continue to be a strength in our portfolio, up 2.1% for the quarter, and continue to be driven by strong contribution from in-house groups across the portfolio and in particular, at our larger group-oriented hotels.

Overall, we achieved a 1.9% increase in same-property total revenues for the quarter.

When looking at our top 10 markets based on 2018 hotel EBITDA, which have changed this quarter as a result of our fourth quarter transactions, our top performers were Napa, up 15.8%; Phoenix, up 8.5%; Boston, up 6.7%; and Santa Clara, up 4.3%. Our Napa hotels benefited from strong market growth over a weak 2017, which was impacted by the Northern California wildfires. Our Phoenix/Scottsdale hotels performed well as a result of strong group business, which laid the foundation for transient compression.

Boston had strong occupancy in the quarter as Hotel Commonwealth benefited from the Red Sox postseason activity and a World Series win. Additionally, other top 10 markets posting RevPAR gains for the quarter included San Francisco and Dallas, which achieved growth on top of the double-digit RevPAR growth achieved in the fourth quarter of last year.

The worst-performing of our top 10 markets for the quarter were San Diego, down 2.2% due to softer in-house group activity, and Orlando, down 1% as they lapped a strong fourth quarter in 2017 when the market benefited from post-hurricane demand.

For the full year, our same-property portfolio experienced 1.2% RevPAR growth, driven entirely by ADR, which was up 1.4%, while occupancy remained essentially flat. Group room revenue for the year was up almost 2% compared to last year, with transient and contract business also up by less than 1%.

For the full year 2018, the strongest of our top 10 markets were Phoenix, up 6.2%; Santa Clara, up 6%; and Atlanta, up 5.1%. Other strong markets included Pittsburgh, New Orleans and Salt Lake City.

In total, 15 of our 26 markets experienced positive RevPAR growth in 2018. Our most challenged market for the year was Santa Barbara, which was down 11% as the market recovered slowly from the mudslides in late 2017 and early 2018, and the absorption of new supply, which will continue into 2019.

As Marcel discussed earlier, we continue to be pleased with our margin performance. 2018 marked 4 consecutive years of margin growth in our same-property portfolios at year-end.

For the year, same-property EBITDA margin grew 5 basis points, with total expenses up only 1.3% despite a 2.5% increase in wages and benefits and a 5.3% increase in real estate taxes and insurance as we were able to find incremental savings elsewhere. In particular, we were extremely pleased with the integration of our 2017 acquisitions into our asset management platform.

On average, the 4 hotels we acquired in 2017 grew margin almost 140 basis points and RevPAR growth of 2.8%. These properties all went through our detailed property optimization process where we identified numerous revenue and cost-saving initiatives, including aligning food and beverage pricing within each property, standardizing guest room amenities and collateral and implementing charges or revisiting pricing for certain guest services such as rollaway beds. These POPs provide us with a detailed playbook we follow on each acquisition, and our proven performance reiterates our unique ability to find operational efficiencies at hotels new to our platform and gives us confidence on our investment thesis for each of our 2018 acquisitions, which to date have exceeded our initial underwriting expectations.

During 2018, we completed reviews at 8 hotels through our property optimization process and we identified nearly $3 million in potential net benefits at those properties, bringing our total to approximately $11 million at properties we currently own since we began this program in 2014, and resulting in nearly $7 million of annualized net benefit.

In 2019, this dedicated in-house team will complete visits at our 4 new acquisitions as well as fully implement a program we call POP 2.0, which revisits properties that have been visited previously and focuses on both retention of previous savings as well as identification of new opportunities.

In addition to these internal opportunities, we expect that a number of brand-driven initiatives will help improve portfolio performance. The continued focus and implementation of resort and destination fees, further implementation and collection of cancellation fees, lower chain service costs, stronger brand loyalty programs and operating initiatives in support of sustainability strategies will also help to offset wage and benefit increases in the portfolio.

I would now like to turn to a quick review of our capital projects completed last year before discussing our exciting upcoming capital plans for Hyatt Regency Grand Cypress and Park Hyatt Aviara.

In 2018, we spent $108 million in capital expenditures. We completed guest room renovations at 7 current hotels and resorts: Andaz Savannah; Hotel Monaco Denver; Hyatt Regency Grand Cypress; Lorien Hotel & Spa; Marriott Chicago at Medical District; Marriott Dallas City Center; and Westin Oaks Houston; as well as at Hilton Garden Inn D.C. and Residence Inn Denver, both of which were sold in the fourth quarter.

In addition, we completed major meeting space renovations at Westin Galleria in Houston, Marriott Woodlands and Hyatt Regency Scottsdale, and significant food and beverage outlet upgrades and additions at Hotel Monaco Chicago, RiverPlace in Portland, Marriott San Francisco Airport Waterfront and Westin Galleria.

In addition to completing the guest room renovation at Hyatt Regency Grand Cypress, in September, we commenced construction of the 25,000 square-foot ballroom and 32,000 square feet of pre-function and support space. As a reminder, this new facility is scheduled to be completed in the fourth quarter of 2019, with approximately $25.5 million of capital to be spent in 2019 as part of the total project cost of $32 million.

As of December 2018, below-grade infrastructure and the ground floor slab have been completed. The final phase of the resort's meeting space upgrade, a comprehensive $7 million renovation of the existing meeting space, is scheduled to begin in 2020. The resort's management team is enthusiastic about both the quantity and quality of business they are putting on the books for this new facility, which will have some of the highest-quality finished space in this very competitive market.

Now turning to Park Hyatt Aviara Resort, Golf Club & Spa, I would like to discuss our plans for the resort, which are an integral part of our overall investment thesis. The capital plan for the resort is expected to total between $50 million and $60 million and will include a transformational renovation of the property and its amenities. This renovation will include a straightforward yet complete renovation of guest rooms and corridors, including case goods and soft goods; renovation and reconcepting of food and beverage outlets; and the renovation of the meeting spaces and pre-function areas, including identification and creation of new meeting space within the resort. The lobby and public areas will be improved to provide more open vistas and better flow throughout the property.

In addition, substantial upgrades will be made to the spa and golf facilities as well as exterior landscaping, outdoor meeting space and pool features and amenities.

As Marcel discussed, the property is originally developed as a Four Seasons resort and opened in 1997. As would be expected, the construction of the property is solid and the resort has a great foundation for us to work with.

Because the resort is in such good physical shape in terms of the building and infrastructure, this transformational renovation is focused primarily on guest-facing areas with a scope, as noted, to expect to drive significant ROI. We are confident in the overall renovation budget having spent the last few months with an outstanding team of designers, the hotel's management team and Hyatt's corporate team, with whom we have worked on many successful ROI-driven renovations over the past few years. This transformational renovation will modernize the resort and enhance its appeal to the broad range of market segments that it has the potential to serve. We believe strongly that this renovation will be very well aligned with the Park Hyatt brand and its customers, will position the resort extremely well against its competitive set, enabling it to regain much of the market share it has lost over time.

The renovation is scheduled to commence in the fourth quarter of 2019. We are targeting completion in the first quarter of 2021. The total renovation spend, we anticipate spending approximately $15 million for the project this year.

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

Thank you, Barry. I will cover 2 topics today. First, I will discuss our 2019 outlook, and then I will turn to a brief review of our balance sheet.

For full year 2019, we expect adjusted EBITDAre to decline by approximately $4 million relative to 2018, as reflected by the midpoint of our guidance range at $296 million. As compared to last year, we expect better hotel operating results and lower expected G&A expense. Offsetting that is a $3 million net transaction activity headwind.

The 3 hotels we sold last year contributed approximately $19 million to EBITDA in 2018. The 4 hotels we acquired last year are expected to earn $16 million of incremental EBITDA in 2019 relative to 2018. In addition, we received a net $5 million in nonrecurring business interruption insurance proceeds in 2018.

Taken together, the net effect of these ins and outs yields adjusted EBITDAre that's expected to be slightly down year-over-year. At the midpoint of our guidance range, we expect 1.5% RevPAR growth in 2019. We're expecting RevPAR growth above 4% at our hotels and resorts in San Francisco, Houston, Napa and Key West. Hotels that were under renovation last year in markets such as Dallas and Denver are also expected to show better-than-average RevPAR growth.

Across the portfolio, we expect displacement due to renovations to be less of a drag to RevPAR than it was in 2018. For the year, we expect a 20 basis point negative impact to RevPAR versus 90 basis points in 2018. For 2019, we expect disruption to occur mostly in the first quarter, but at a much lower level than in last year's first quarter.

As a reminder, in 2018, we had 220 basis points of impact in the first quarter, followed by 50 and 75 basis points of impact in the second and third quarters, respectively, and not much impact in the fourth quarter. The supply growth forecast in our competitive markets continues to decline. On an overall rooms weighted basis, supply growth in our market tracks is expected to be approximately 2.5% in 2019. That number has come down from last year due both to our transaction activity and new hotel developments taking longer to be built and opened. Some markets, such as Savannah and Portland, are expected to experience higher levels of supply growth. Other markets, such as Chicago and Boston, will be more challenged due to lower citywide convention demand than last year. However, as we look across our most significant markets, such as Orlando, Houston and Phoenix, our positioning gives us confidence in our outlook.

This year has started off well as our RevPAR grew 3.4% in January. We are on track to post even higher RevPAR growth in February. The Super Bowl in Atlanta as well as renovation comparisons over last year are expected to make for a strong top line in the first quarter relative to 2018.

Turning to the group side of the business. We began the year with about 2/3 of our expected full year group revenue as definite. As a reminder, group represents approximately 35% of our rooms revenue. At year-end 2018, our 2019 group revenue pace relative to last year is up approximately 2%.

For our top 15 group hotels, which together represent 75% of our definites, our 2019 group revenue pace was up over 3%.

Turning briefly to other revenues. We are expecting growth in this area to be higher than RevPAR growth. We expect to see food and beverage revenue growth outpace RevPAR growth, as it did in 2018. One of the key drivers of this is improved banquet and catering revenue as a result of our mix of group business. As to same-property hotel EBITDA margins, we expect these to be approximately flat in 2019 versus 2018. We expect continued success in finding margin growth opportunities to offset a more difficult expense environment.

As Barry and Marcel each mentioned, we grew margins last year for hotels acquired in 2017 and expect those opportunities to continue for newly acquired hotels. Offsetting this will be expense increases that we, together with other hotel owners, are facing. In particular, as to expenses of a more nonoperational nature, we are seeing continued inflation in certain areas.

We expect property tax expense to grow almost 7%. We expect property and liability insurance expense to grow nearly 10%. Given that our portfolio continued to evolve last year, we would like to provide some additional detail about the seasonality of our earnings.

We expect to earn approximately 30% of our hotel EBITDA in the second quarter, followed by nearly 25% each of the first and fourth quarters and just over 20% in the third quarter. As to business interruption insurance, we have reached final settlements on all but one of our outstanding claims. We have one remaining outstanding claim still open at Hyatt Centric Key West Resort & Spa, but we are not expecting significant proceeds, given that business there is quickly returning to more normalized levels.

Moving to adjusted FFO. We are currently projecting to earn between $231 million and $247 million. It reflects the adjusted EBITDAre that I just discussed. In addition, we expect a $2 million increase in interest expense due to new financings and higher interest rates as compared to last year. On a per share basis, this results in guidance of $2.02 to $2.16 of adjusted FFO per share. This is based on 114.4 million weighted average diluted shares and units outstanding for the full year.

Now we'll move to my second topic, our balance sheet. During 2018, we continued to improve our balance sheet profile. Subsequent to year-end, we completed the final draw on our new unsecured term loan. The outstanding balance on the loan is now $150 million. Pro forma for this draw, approximately 80% of our debt is fixed or hedged to fixed. This compares favorably to year-end 2017, at which time a little over 70% of our debt had fixed rates. Our weighted duration is currently 4.8 years. Finally, in a rising rate environment, our weighted average interest rate is 3.9%, which is roughly 20 bps higher than it was at year-end 2017.

At year-end, we had net debt to adjusted EBITDA of 3.6x. That was over 0.5x below the leverage ratio at the beginning of 2018. We continue to have well-staggered debt maturities, having addressed all 2019 loan maturities and all but one small 2020 loan maturity.

Our balance sheet is strong, with approximately $150 million of available cash at present. We have 30 unencumbered assets that together represent approximately 2/3 of our annual hotel EBITDA. We continue to believe that our balance sheet strength can support our strategic goals.

Turning to the equity capital markets front. We finished 2018 having sold over $135 million of common stock through the ATM at a weighted average price of $24.02. While we did not buy back stock last year, we continue to believe share repurchases can be a good tool to drive shareholder value, as evidenced by our track record on this front.

That concludes our comments. Andrea, could we move to the Q&A session and take our first question at this time?

(Operator Instructions) And our first question will come from David Katz of Jefferies.

I wanted to ask just a strategic question, and I'll admit that I got on just a few minutes late, so I apologize if I missed it. But it has -- really has been a pretty busy year with the amount of buying and some selling. Should we think about the story transitioning a little bit to harvesting what you've planted at this point in the portfolio? Or do you expect that there is some more activity that may be coming our way the rest of this year?

Thanks, David. As I started our prepared remarks, and as you mentioned -- said, you may have joined a little bit late, I did start with an outline again of kind of the 3 pillars of our company strategy as we've outlined a number of years ago. And obviously, transaction activity to enhance portfolio quality over time and enhance the growth profile of our earnings over time is a very significant pillar of that strategy, and it's something that we've, to your point, been very active in over the past few years. What we want to do going forward is make sure that we maintain a very strong balance sheet that gives us optionality to the extent we find interesting opportunities out there. I do believe that through our activities internally on renovations on assets where we've done a lot of work over the last couple of years and through the acquisitions that we've made over the last few years, we've set ourselves up very well for the next few years. And as we continue to look ahead, we'll look at opportunities to continue to enhance that overall portfolio quality, and it will really depend on what we see out there from an opportunity standpoint.

So if I can just follow that up, and I appreciate you repeating yourself for me. But is there a weight on the performance of the portfolio? If I were to just play devil's advocate for a moment, based on the fact that there's a number of new hotels and some construction going on, is there a weight on the portfolio for a period time? And when might that weight lift if, in fact, there is one?

Well, we obviously talked a little bit about seeing renovation impact throughout the portfolio, which was frankly a little bit more elevated last year. We had about 90 basis points of impact through renovations on our RevPAR growth. For this year, as we sit here today, it's about 20 basis points. And it's actually a lower number of assets where we have renovations going on this year. We just have a couple of bigger projects and the ones that Barry discussed as it relates to Grand Cypress with the ballroom that we're adding, which we really view as a real ROI opportunity for us. And then, obviously, the work that we'll be doing at Aviara. So we think those are going to be great growth vehicles for us going forward, but we certainly are looking to benefit and harvest off of the improvements that we've made at the assets that we frankly touched over the last 2 or 3 years.

Our next question comes from Michael Bellisario of Baird.

Marcel, can you maybe give us your updated view on larger-scale M&A opportunities and how you approach that maybe from both angles?

Now as I also pointed out in my comments at the start of the call, we were very pleased with how we've been able to grow our portfolio through really very targeted acquisitions that are right on strategy for us. So we haven't found, frankly, from our perspective, larger-scale opportunities, either on a portfolio -- from a portfolio standpoint or a company standpoint that we have found more attractive than kind of building through the strategy that we have maintained over the past few years. And I've obviously stated in the past that we've done, frankly, everything as a management team as it relates to transactions, whether that's one-off transactions, portfolio transactions, company transactions, so we've been very well versed in being on both sides of those type of transactions in the past. And our view is -- hasn't changed over time. Our view is always that we're looking to drive long-term shareholder value, and that's where our focus will remain on any side of any transaction in the future.

Got it. And then, as you think about the single asset acquisitions, kind of what does the pipeline look like today? And then, how have pricing expectations changed at all recently, given the recent market volatility?

Well, I probably sound somewhat like a broken record sometimes when these questions come up as it relates to this because I don't think the pipeline is necessarily terribly deep currently. We're not seeing just the kind of wealth of opportunities out there. But we continue to look at a fair number of things that are out there, and historically, we've been able to find those opportunities even at a time where maybe the pipeline has been a little bit lighter. So I haven't seen a dramatic change there. I think, over the past few months, we haven't really seen an enormous shift one way or the other as far as the depth of the pipeline goes and/or pricing expectations. As you know, there have been a few transactions in this space recently with some larger transactions and some transactions that happened with some of our peer REITs where it appears that pricing is staying relatively stable.

That's helpful. And then, just last one on San Francisco. I know you mentioned kind of better than portfolio average growth there, but can you maybe help us think about your properties in that area, and then kind of the compression that you're expecting to get at those hotels outside of the CBD?

Yes. Sure, Michael. So when we talk about San Francisco as a market, it's the one hotel, the Marriott San Francisco Airport Waterfront, distinguished from Napa, which we talked about, separate market, considered STR, and then Santa Clara, also a separate market. But speaking specifically about the San Francisco Airport Marriott property, we do expect good growth there this year. It's a little -- it will be a different -- a little different growth and more muted growth than you'll see from the downtown hotels. But it follows for us 3 years of significant RevPAR growth in '16, '17 and '18, where we never saw a decline, in fact, continued to grow RevPAR significantly in '16, and then on a more moderate basis in '17 and '18. So it plays a little bit different market there. We do get compression downtown, for sure, but our primary business is serving the mid-peninsula. A quarter on, we expect good growth there, but not necessarily huge amount of compression from the downtown business any greater than that what we saw historically looking back 3 or 4 years kind of pre-Moscone renovation.

And I -- what I will add to that is that as Barry points out, Napa is a bit of a separate market for us. But as you can see from our growth there in the fourth quarter, we were lapping some of the disruption that we saw in the prior year. We're certainly expecting some good growth and compression to come out of San Francisco to help us with those assets as well.

Our next question comes from Thomas Allen of Morgan Stanley.

On Houston, you guys highlighted you expect RevPAR to be up over 4% in 2019. Can you just talk about the kind of gives and takes there?

Yes. Sure. So as you know, Houston has been a very evolving story for us over the past few years. I think, at this point, to talk specifically about the Galleria, I mean, we are virtually done with the renovation and repositioning work there. We've got a very light lobby refresh and some meeting space to do in the Oaks tower, but the Galleria has been done now for over a year. The Oaks guest rooms have been completed now for a few months, and we're seeing very strong ramp-up. We're executing the business plan that we'd always set out to do, which is really become the leading high volume corporate for large volume corporate accounts and return the property to its positioning in the group market that really hadn't been able to enjoy due in part to both relatively dated interiors and a feel of the hotel as well as what the market went through. So we're seeing strong demand in the Galleria market across-the-board in virtually every segment and look to take advantage of that this year. Woodlands, despite some supply, we've got some decent growth there. Obviously, excess of 4%, as Atish referenced. In part, we had the significant meeting space renovation last year, which took -- that's a very large amount of meeting space in that hotel. And it took us off-line for meetings for a period of time. We certainly did it during the slowest time of the year, but the market's reacting very well to the renovated meeting space as well as to we know we'll be lapping that renovation this summer which gives a lot more opportunity to drive group business to that hotel this year.

The only other point I'd add, Thomas, is if you look at the earnings from those hotels back in '14, they were making close to $40 million. And last year, they made just under $30 million, so there's a lot of upside potential. And certainly, we're happy with the overall positioning. And we think we're set up well for multiple years of outperformance just to get back to that peak level that we reached several years ago.

That's helpful. And then, just on the renovation commentary. So you had 90 bps of renovation headwinds last year. You say you're going to have an incremental 20 bps of impact on growth this year, but you're going to spend less on CapEx than what you were spending on -- it seems to me like in Grand Cypress, you're building a new ballroom, right? Shouldn't that -- that's going to displace more? And then, Aviara, you didn't own for most of last year. So...

Yes. Hold on one second, Thomas. So it's not incremental. What we're saying is, last year, we had 90 basis points of impact on a full year basis. This year, we have 20 basis points. It's not incremental, though, relative...

It's on a growth rate, right?

It's on our overall RevPAR. That's what we're saying. So it's actually 70 basis points less disruption in '19 than in '18. Sorry for that.

No, we're on the same page now.

Our next question comes from Bryan Maher of B. Riley FBR.

So we were a little surprised by the strong F&B. Can you give us your view on is that coming more from kind of transient leisure? Are you seeing strength in your group bookings? And what are your expectations for that to continue on into 2019?

Thanks, Bryan. We talked about this a few times last year. And I think we certainly have continued to see a trend as we bought a larger group of hotels, and in particular, the 2017 acquisitions of Hyatt Regency Scottsdale and obviously, Grand Cypress, that we have a real ability and opportunity to grow particularly the group banquet side of the equation. That's where most of the growth is coming from. We continue to have decent performance in our restaurants, and I think we've rightsized and have our restaurants set up and are renovating them the right way to be decent hotel restaurants. But I think the real growth you're seeing in food and beverage is driven almost exclusively on the group meeting and catering side. We're seeing lots of opportunities as the economy strengthened a little bit through the year to upsell groups -- or for our management companies to upsell our groups into more expensive meals, additional beverage packages, things like that. And we were -- I think we were also surprised by through the year and continue to see growth through the year, but we're fairly confident and are now seeing it more so than last year where there was a lot of last-minute additions. We're seeing that being booked in the contracts in our booking pace for 2019. So feel pretty good about that trend continuing.

And how are you thinking about margins as it relates to your F&B activity?

Well, I mean, we're obviously grateful that our growth in food and beverage is coming through banquets, which are certainly by far the most profitable portion of that business. We did a tremendous job last year on controlling food and beverage expense, and part of that is a reflection of the shift from restaurant business to banquet business. So to give -- so in fact, overall, food and beverage expense in the portfolio was virtually flat last year on close to 2% revenue growth in food and beverage, looking at the portfolio overall.

And then, just lastly, I was a little surprised not to see some buyback activity in kind of the depths of December. How are you guys thinking about that when the stock kind of bounced below $18? I know it only stayed there for maybe a week to 10 days, but what was the thought process internally not to deploy capital to buy back shares at that time?

Yes, that's a great question, and I think that dynamic that you mentioned was -- is a relevant one. I mean, as we looked at that activity in that period of volatility in December, it was just very short-lived that you saw that move down. I think, philosophically, our position on this hasn't changed, and we have a really good track record. I mean, we bought back in '16 and '17 over 5 million shares for $15 a share. So our track record is strong. We have a remaining authorization of nearly $100 million. We think it's a good tool. But specifically with regard to the fourth quarter, I mean, what you had is that period of volatility at the very end of the year. And there was a lot of uncertainty in the market, I think, with the shutdown looming and entering a blackout period for us and other companies, so I think that factored into the thinking. But overall, we still feel like it's a great tool to have, and we certainly feel like there's value there. So...

Our next question comes from Brian Dobson of Nomura Instinet.

Thanks for that color on supply growth within your areas of operation. So I understand that that's decelerating because of the shift in your portfolio distribution, but does it appear to you that any of that supply growth deceleration is coming from an actual same-store supply growth deceleration in those markets that you're operating in?

Yes. I think what's happening is, as we look across our markets and our track specifically at new projects, we're seeing that they're taking longer to be built and to open. So you're seeing that reflected in our numbers. So if you looked at supply growth for '19 about 1 year ago, it would have been roughly 20 to 30 basis points higher, so in the 2.7% to 2.8% range for '19. Now we look at it and it's about 2.5%. So as I mentioned, some of that is because, certainly, the transactions that we've done, but it's also because projects are taking longer to get to open.

And what would you attribute that longer time line, that longer project time line to?

Well, our sense is that it's construction labor, construction costs, availability of construction labor. I mean, those factors. I mean, we're not in the business obviously of building hotels, but that's the sense we get from the operating teams and our knowledge of these markets.

And as you're out in the market bidding for assets and looking at assets, who do you see your competitors being right now? What types of companies?

Well, frankly, it's a mix. It really depends on which particular opportunity you're looking at. And in some cases, our sense is that we're competing with some of our peers. Sometimes, you're competing with more private equity type investors. It generally depends a bit on geographic locations and whether someone has exposures in certain markets, whether something is 100% a strategic fit for us versus our peers. Some of the properties that we bought last year absolutely fell into both buckets. We know that some of our peers looked at and took a round at some of the assets, and we know that in our cases, they were probably a little bit more between us and private buyers. But there's a good, robust group of people that are looking for dry type of acquisitions, obviously. So many times, in our mind, it comes down to your experience and expertise in being able to underwrite expeditiously, being able to refocus on those opportunities that you think are just great strategic fits and try to put all your effort into being able to buy those particular assets.

Our next question comes from Bill Crow of Raymond James.

Marcel or maybe this is Barry, which brands -- given that you have a presence in your ownership of many of the different brands that are out there, which brand family is sort of doing the best job of lowering customer acquisition cost and other ownership costs? Who's really kind of moving the needle?

Because you gave us the option of either me or Barry answering it, I'll let Barry answer it.

There you go.

So I think we're continuing to see that evolve, and I think every brand has their own idea of kind of how to do that a little bit differently. I mean, we certainly -- as you know, the largest brand family in our portfolio is Marriott. We certainly think they spend the most time thinking about that, and that we believe that, ultimately, part of them being the largest brand family and having the most brands and the most points of distribution that they will be able to drive lower cost. And we are fairly confident we're going to see some of that this year. I think, certainly, we're going to see some benefit this year, we think, and started seeing late last year from the Kimpton-IHG transaction specifically as it relates to brand cost and cost of distribution. We also -- similarly, we think Hyatt does a good job. They're very focused on it. It's an area certainly where they probably have more room to catch up than some of the other brands, but we know through our involvement with them through the hotels we own, our involvement on their own advisory council, that they're spending a lot of time focusing on it as well. So it's very hard to see kind of who's best today. And I think we're really starting to converge toward a better world in terms of that as these companies have really listened, we think, well to owner feedback and know that that's how they're going to satisfy owners going forward is by focusing on those costs, ultimately reducing them and getting the right kind of distribution at better pricing.

All right. Marcel, I'm not going to let you off the hook, though. Here's my argument. It is that it seems like your risk tolerance may have increased a little bit with the Aviara acquisition. Just given the combination of luxury, high price per key, late cycle economically in lodging, and then this $50 million CapEx spend over a couple of years, you're really betting more on kind of a 2022 or 2021 outlook. Is that fair? And did the returns that you're expecting on this particular asset, are they higher than what you've looked for in other maybe straighter down the middle, another fairway sort of acquisitions that you've done?

Well, that's a fair question, Bill. From our perspective, a lot of the things you actually talked about are great opportunities. We actually think that the cost per key for this asset when you're thinking about 222 acres of fee-simple land and outside of San Diego at $520,000 a key is very attractive when you look at it compared to resorts in that area, and as I said my comments, when you look at resorts of that ilk nationwide. So we believe that we got into the asset at a really attractive basis. I also pointed out some of the other things that are attractive to us. We bought it from a financial institution that isn't lodging-focused and clearly has not had the same kind of asset management expertise and oversight that we can bring to that asset. The type of renovation that we're doing here, even though it's $50 million to $60 million, it's very much cosmetic in nature. It's the kind of stuff that we believe is our bread and butter. We have that very experienced project management team that has done these type of projects and, frankly, more complicated projects in the past, too. So we think this all lines up very well for what we can do very well and where we can actually really move the needle. Working with Hyatt was obviously a very strong relationship for us, where we have tremendous experience renovating assets and executing on that and really moving the needle operationally creates great opportunity for us. So from a risk tolerance standpoint, we view it as just a very much an untapped opportunity, where there's a lot of upside. And we know it was a better process to acquire this hotel. So we certainly weren't alone in feeling that way. So from that perspective, as you talk about the cycle, we think that luxury resorts are well positioned at this time because of the lack of new supply that's been added in that space. We've clearly moved our portfolio more upscale over time, and we think that there are just a lot more levers for us to pull to actually create value as opposed to some of the assets that we sold where we feel like we've been able to optimize most of those operations already.

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

I would like to thank all of you again for joining our call. I'd like to reiterate how pleased we were by our activity and results in 2018. We continue to believe we are good allocators of capital, demonstrated by the significant progress in improving the quality of our assets, executing on projects to enhance the long-term value of the company and positioning the balance sheet to once again be opportunistic. So we look forward to sharing our progress in 2019 as we continue to execute against our strategy.

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