Xenia Hotels & Resorts, Inc. (XHR) Earnings Call Transcript & Summary

Good afternoon. Thank you for attending today's Xenia Hotels & Resorts, Inc. Q4 2022 Earnings Conference Call. My name is Tamia, and I will be your moderator for today. [Operator Instructions] It is now my pleasure to pass the conference over to your host, Amanda Bryant, VP of Finance. Please proceed.

Thank you, Tamia. Good afternoon, and welcome to Xenia Hotels & Resorts' Fourth Quarter 2022 Earnings Call and Webcast. 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 a discussion of our performance and recent investment activity. Barry will follow with more details on operating trends and capital expenditure projects. And Atish will conclude our remarks on our balance sheet and outlook for 2023. 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 are concerned 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 this morning, along with the comments on this call, are made only as of today, March 1, 2023, 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 and earnings supplemental, which is available on the Investor Relations section of our website. The fourth quarter property level portfolio information we will be speaking about today is on a same-property basis for 30 hotels. This excludes Hyatt Regency Portland at the Oregon Convention Center and W Nashville. An archive of this call will be made available on our website for 90 days. I will now turn it over to Marcel to get started.

Thanks, Amanda, and good afternoon to all of you joining our call. Following a slow start to 2022, as the Omicron variant significantly impacted all demand segments, industry fundamentals and our portfolio's performance improved meaningfully as the year progressed. Leisure and group demand strengthened significantly in the second quarter, and this was followed by a steady recovery in business transient demands during the third and fourth quarters. Our 2022 results substantially exceeded the expectations we had at the beginning of the year, and our fourth quarter results allowed us to finish out the year near the high end of the guidance we provided after the third quarter for net income, adjusted EBITDAre and adjusted FFO per share. Same-property portfolio RevPAR for full year 2022 declined just 5.1% relative to 2019, driven by a double-digit increase in average daily rate growth. Notably, the rest of our gaps to 2019 narrowed as occupancy improved over the course of the year and ADR growth remained strong. On a same-property basis, 2022 hotel EBITDA of $256.4 million was roughly 3% below 2019 levels. Margins were 40 basis points higher as compared to 2019. In 2022, all 30 of our same-property hotels achieved positive hotel EBITDA. However, only 12 of our hotels and resorts generated EBITDA in excess of 2019 levels, supporting our belief that we still have considerable recovery potential across the majority of our portfolio. This is particularly evident in 6 of our larger corporate- and group-focused hotels, mainly Marriott San Francisco Airport, Hyatt Regency Santa Clara, our 2 Dallas hotels and our 2 Westins in the Houston Galleria markets, as these hotels were collectively over $30 million behind in terms of hotel EBITDA in 2022 as compared to 2019. Now turning to our fourth quarter results. We reported net income of $35.3 million, adjusted EBITDAre of $64.6 million and adjusted FFO per share of $0.41. Our same-property RevPAR for the fourth quarter increased 0.6% as compared to 2019, representing the second quarter of positive growth relative to 2019 since the onset of the pandemic. Average rate growth remained very strong, with a 15% increase compared to the fourth quarter of 2019, which offset about 9 points lower occupancy. Margins improved 17 basis points compared to 2019, despite continued inflationary pressures, particularly in labor and utilities. We continue to successfully execute our long-term corporate strategy in 2022. Through transaction activity, we improved the overall quality and anticipated growth profile of our portfolio. We acquired W Nashville early in the year for roughly $328 million. And we sold 3 hotels for an aggregate sales price of $133.5 million, including Bohemian Hotel Celebration and Hotel Monaco Denver, in the fourth quarter. Collectively, our 2022 dispositions occurred at extremely attractive valuation multiples despite a challenging transaction market in the second half of the year. On a blended basis, the aggregate sale price for the 3 dispositions reflected a weighted average multiple of 15.4x 2019 hotel EBITDA. The sale price for the 2 properties we sold in the fourth quarter represented a combined 17.1x multiple on the hotel EBITDA generated during the trailing 12-month period ending September 30. These valuations were particularly attractive in light of alternative uses for our capital. W Nashville continued to ramp up in its first full year of operations. We and Marriott had several important learnings over the year, including the seasonality of the national markets, the optimal mix of group and transient business, break strategy and food and beverage optimization and positioning. Although the results during our first 9 months of ownership were below our expectations, we are confident these learnings will benefit us going forward, and we remain optimistic that the hotel will achieve our expected same-line profitability in the years ahead. Meanwhile, we are encouraged by the results we achieved in 2022 at our other most recent acquisition, Hyatt Regency Portland at the Oregon Convention Center, during its first full week calendar year of operations. Despite an extremely difficult operating environment in a market that was slow to reopen, its EBITDA matched our initial underwriting for its first full year of operations, helped by an excellent job by Hyatt's managing costs. We are optimistic that an improved events calendar and encouraging group base will result in steady EBITDA increases in the next few years. We expect that both W Nashville and Hyatt Regency Portland will be significant drivers for our future portfolio EBITDA growth. Over the year, we balanced a range of capital allocation priorities, including returning capital to shareholders through the share repurchases and reinstating a $0.10 per share quarterly dividend. Additionally, we further fortified our balance sheet and now have no debt maturities until 2025. Atish will discuss our balance sheet activities in greater detail shortly. Entering the year, we also invested in several important internal ROI projects at key properties and completed planning work for several upcoming projects that we expect to generate meaningful earnings growth in the years ahead. While Barry will provide details on these various projects in his remarks, I would like to highlight one large and exciting project we are expecting to complete over the next 2 years. In early February, we announced plans to invest approximately $110 million in a complete transformation and expansion of the 491-room Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch. The investment is intended to maximize value of a high-performing asset in a strategically important market by optimizing its ability to capture a premium rate of group and leader transient business and compete most effectively with other luxury resorts in the Phoenix, Scottsdale market. Upon completion, which we currently expect to occur in late 2024, the property will be rebranded as the Grand Hyatt Resort, with an additional 5 keys, the substantial increase in meeting and event space, significantly upgraded and exciting new food and beverage offerings, the revamped pool complex and a substantially enhanced room product. While the resort generated record EBITDA in 2022 as a result of extremely strong post-COVID domestic leisure demands, we believe that this investment will allow the property to optimize its long-term mix of group and transient demands and maintain and improve its ability to drive premium rates. Upon stabilization, we expect the property to generate 50% higher RevPAR and a near doubling of hotel EBITDA from pre-pandemic stabilized levels, effectively closing the performance gap with the property's competitive set which has also experienced meaningful capital investment in recent years. While this transformative renovation will cause short-term cash flow disruption to a high-performing asset in our portfolio, we strongly believe this project is both attractive from an ROI perspective as well as appropriately timed to drive long-term profit growth and value appreciation in an important market for our company. Xenia's had a long and successful relationship with Hyatt, which underscores our confidence in our ability to generate attractive risk-adjusted returns in Scottsdale. This includes 2 recent successful ROI investments at Park Hyatt Aviara and at Hyatt Regency Grand Cypress. Both properties have achieved significant improvement in earnings and market share following our capital investment after acquiring these outstanding resorts in 2018 and 2017, respectively. Following the acquisition of Park Hyatt Aviara in late 2018, our approximately $58 million additional capital investments has resulted in a more than doubling of the property's EBITDA and a meaningful increase in RevPAR index. While we already reached our projected stabilized EBITDA range in 2022, despite the lingering impact of COVID, particularly on group business, we see substantial opportunities for further gains in the coming years. Rate growth has been particularly impressive, but we believe that improved group business will allow us to drive occupancy and further optimize the demand mix in the years ahead. And at Hyatt Regency Grand Cypress, our post-acquisition capital investment of approximately $45 million included renovation and expansion of the meeting space as well as a targeted renovation of all guest rooms. The property performed extremely well through the pandemic, increasing its EBITDA by approximately 50% between 2018 and 2022 and continuing to gain market share. However, it's still very much in the early innings when it comes to optimizing group business and reaping the full benefits of the expanded and upgraded meeting space. We expect the 25,000-square-foot ballroom addition will allow us to unlock significant growth in the years ahead as Orlando remains a very attractive market for group business and the property is well positioned to take market share. Similarly to the 2 resorts I just highlighted, we acquired Hyatt Regency Scottsdale at a very attractive basis in 2017. Our projected capital investment will raise our bases in the resort to approximately $680,000 per key. We believe that this basis remains extremely attractive for a luxury resort in the Scottsdale markets, especially when compared to recent transactions for comparable assets and current replacement costs. To conclude my remarks, we are extremely proud of our performance and strategic actions we have taken over the past several years. We navigated through a very challenging period for the lodging industry, yet we emerged with a higher-quality portfolio and a better expected growth profile, supported by a conservative capital structure and ample liquidity. We are optimistic looking ahead to 2023 and beyond despite a continued cloudy for the general economy, especially as we look towards the second half of the year. We believe our efforts during the pandemic and in the early phases of the recovery has positions us well to remain opportunistic as it relates to potential acquisitions and other potential ROI opportunities. There could be additional drivers of earnings growth in the years ahead. And we expect that the stabilization of our recent acquisitions, the recovery potential of our urban group and business transient-focused hotels and the further growth opportunities for our recently renovated properties will be meaningful internal EBITDA growth drivers. With that, I will turn the call over to Barry, who will provide additional details on our fourth quarter performance and our capital expenditure projects.

Thank you, Marcel, and good afternoon, everyone. For the full year 2022, our 30 same-property portfolio RevPAR was $166.08 based on occupancy of 63.9% at average daily rate of $259.92. As Marcel noted in his remarks, same-property portfolio RevPAR decreased 5.1% as compared to 2019. This decrease reflects nearly 13 points lower occupancy, which was partially offset by a 13.8% increase in average daily rate as compared to full year 2019. Our properties achieving the strongest RevPAR growth as compared to 2019 included Hyatt Centric Key West, Park Hyatt Aviara, Royal Palms and Bohemian Savannah, all of which benefited from robust leisure demand throughout the year. Conversely, the RevPAR declines compared to 2019 were experienced at Marriott San Francisco Airport, Hyatt Regency Santa Clara and Hotel Palomar Philadelphia, which are more dependent on business transient and group demand. For the fourth quarter, our 30 same-property portfolio RevPAR was $166.87 based on occupancy of 64.1% at an average daily rate of $260.19. Same-property portfolio RevPAR increased 0.6% in the quarter as compared to the same period in 2019. For the fourth quarter, the same property leaders and laggards were the same as for the full year, where we note that each of the laggard hotels achieved significant growth in Q4, in 2022 over Q4 of 2021, suggesting that recovery is well underway. As expected, results in the fourth quarter vary across the months given the timing of holidays and the usual seasonal mixtures. Same-property RevPAR in October and November declined 0.1% and 0.4%, respectively, as compared to 2019, while December RevPAR increased 2.6% compared to 2019. Overall business in the fourth quarter reflected a transition in our business from what has been primarily leisure demand over the past few quarters to a more traditional mix of leisure, corporate transient and group demand. Mid-week occupancies continue to improve, particularly in October, where we had several weeks with midweek occupancy above 80%. October trends followed the similar patterns of September. This was driven by an increase in occupancy, consistent with expected seasonal patterns in business transient and group and generally coincided with a marked increase in a return to office and business travel. Overall, October occupancy of 70.9% was a post-COVID record relative to 2019 with occupancy down less than 10 points. Rate growth remained robust in the quarter, average daily rate at our same-property portfolio up 15% as compared to 2019. Of our 30 same-property hotels, all but 5 achieved higher average daily rates in the fourth quarter of 2022 than they did in the fourth quarter of 2019. We are optimistic regarding corporate group rates, particularly as we achieved higher mid-week occupancies in a number of our urban markets, including Santa Clara, San Francisco, Houston and Dallas on Tuesday and Wednesday nights, providing significant rate compression opportunities. Our managers anticipate further improvements in corporate transient business fundamentals and expect negotiated corporate rates to increase in the high single-digit percentage range this year. Similar to prior quarters, we saw continued rate strength in our resorts and in our drive-to leisure markets, with average daily rates for the quarter compared to 2019 of more than 30% in our properties in Arizona, Key West, Napa and San Diego. Turning to group. In the quarter, our group business benefited from solid in the quarter for the quarter billed booking and double-digit rate growth, resulting in group rooms revenue exceeding fourth quarter of 2019 levels by over 5%. Our performance reflected healthy demand from corporate groups, particularly in our larger group-oriented hotels in Orlando, Scottsdale and San Diego. Our full year 2022 group meetings revenue ended about 9% lower than 2019. Looking ahead to 2023, the group revenue pace is currently about 21% of 2022, and group rates for 2023 reflect a high single-digit increase over 2022. Now turning to expenses and profit. Fourth quarter same-property hotel EBITDA was $65.4 million, an increase of 3.3% on a total revenue increase of 2.7% compared to the fourth quarter of 2019, resulting in 17 basis points of margin improvement. This modest growth in hotel EBITDA margin for the quarter was primarily impacted by a continuation of higher labor and utility costs. On a full year basis, the total EBITDA margin increased 40 basis points relative to 2019, and reflects primarily the outsized increase we achieved in the second quarter of 2022. With respect to labor, and as we discussed in the third quarter, our operators successfully have staffed up to meet the strong recovery in demand where necessary. In general, our fully recovered hotels are opening at FTE staffing levels between 90% and 95% of pre-pandemic levels, while hotels where there's still substantial opportunity for recovery were operating FTE staffing levels between 60% and 70% of pre-pandemic levels. Now turning to CapEx. During the fourth quarter and over the full year, we invested $29.7 million and $70.4 million in portfolio improvements, respectively. This compares to our initial expectation of approximately $95 million in total capital spending for the year, as a number of projects have had portions of their spend delayed into 2023. During 2022, some of the significant renovation projects in our portfolio included: At Kimpton Canary Santa Barbara, we completed a comprehensive renovation of public spaces, including the meeting space, lobby, restaurant bar and rooftop. We also began a comprehensive guest room renovation in the fourth quarter, which is expected to be completed in the second quarter of 2023. At Grand Bohemian Hotel Orlando, we conducted a comprehensive renovation of public spaces, including meeting space, lobby, restaurant, bar, Starbucks and the creation of a rooftop bar we expect to be completed in the first quarter of 2023. The comprehensive renovation of the guest rooms, including substantial tub-to-shower conversions, will commence in the second quarter [ of 2023 ]. At Park Hyatt Aviara, we refurbished the nearly 30-year-old golf course, including replacement of turf brass, bunkers, irrigation heads and controls, car paths and curving, all of which will result in significant reduction in water use. We are also well underway with the implementation of a combined heating and power system which should substantially lower our utility costs. In the fourth quarter, we began work on a significant upgrade to the resort's spa and wellness and entities, which will be branded as the Miraval Life in Balance Spa upon completion late in the second quarter of 2023. At Waldorf Astoria Atlanta Buckhead, early in the year, we completed a guest room renovation, including all soft goods and a restaurant and laundry renovation, including reconcepting of the restaurant and bar. At the Marriott Woodlands in Houston, we completed a full bathroom renovation in all guest rooms, including conversion of tubs to showers in 75% of the guestrooms. At Marriott Dallas Downtown, Royal Palms and Fairmont Pittsburgh, we renovated meeting and pre-function space. And Fairmont Pittsburgh added a licensed Starbucks outlet in the lobby. At the Ritz-Carlton Denver, we're continuing to work on the renovation and reconfiguration of suites, which will result in 3 additional keys upon completion this quarter. At the Kimpton Hotel Monaco, Salt Lake City, we continued planning work on a comprehensive renovation of meeting space, restaurant, bar and guest rooms. It is expected to commence in the second quarter of 2023. Including the ongoing projects I just mentioned, in 2023, we expect to spend approximately $130 million to $150 million on capital expenditure projects, the most significant of which is the transformation and upbranding of the Hyatt Regency Scottsdale, as discussed earlier by Marcel. This phased project is expected to commence in the second quarter of this year, with completion expected late next year when the property will be upgraded to the Grand Hyatt brand. We're excited about the work our in-house project management team has completed over the past several years and are even more excited about the projects that we have underway in various stages of planning. With that, I will turn the call over to Atish.

Thanks, Barry. I'll [ cover this ] afternoon, our balance sheet and guidance. First, on our balance sheet. We further strengthened it in January by extending our debt maturities, and we now have no debt maturities until the second half of 2025. We thank our long-standing bank partners for their continued support. In addition, our base of unencumbered assets has grown. Out of our 32 hotels, 29 do not have property-level debt, which reflects an additional source of capital. Our liquidity is strong with an undrawn $450 million revolver and approximately $300 million of cash. At year-end, our leverage ratio was approximately 4.5x trailing 12 months net debt to EBITDA, which is inside of our long-term target of sub-5x leverage. Turning to return of capital. Since last fall, we've repurchased about 2.5% of our outstanding shares at an average price of about $14.50 per share. We have over $150 million of remaining capacity under our current Board repurchase authorization. We continue to view share repurchase as a favorable capital allocation tool given that we still trade at about a 30% discount to our average external NAV estimate, which is about $21 per share. In addition, we declared a $0.10 per share dividend in the fourth quarter. Our effective annual yield is about 2.75% based on our current share price. Now turning to my second topic, our full year guidance we provided in this morning's release. As the recovery continues, we are encouraged by strengthening group and business transient demand. We expect full year 32-hotel RevPAR to increase approximately 6% at the midpoint to about $173. That is inclusive of 200 basis points of room revenue displacement due to renovations. As to quarterly cadence, we expect RevPAR growth in the mid-20% range in the first quarter, driven by occupancy gains. During the second half, we expect flattish RevPAR relative to last year due to tougher comps as the year progresses as well as the impact of renovations. For the full year, we expect adjusted EBITDAre to be about flat to last year. While we anticipate growth from our new hotels, W Nashville and Hyatt Regency Portland, as they continue ramping up as well as solid top line growth in many of our other urban and group hotels, these gains are expected to be offset by 3 items relative to last year. The 3 items are: Number one, lower cancellation and attrition fees; number two, the dispositions that we made last year; and number three, renovations. These 3 items represent a nearly $30 million EBITDA headwind when comparing to last year. As to seasonality in adjusted EBITDAre expected for this year, we expect to earn about 60% in the first half and about 40% in the second half. Turning ahead to adjusted FFO. For the full year, we expect to earn $1.48 per share at the midpoint. That is approximately 4% behind last year due to both higher interest expense and higher income tax expense. In conclusion, we continue to be optimistic about the recovery. The long-term outlook is promising as demand continues to improve while the number of new hotels being built in the U.S. continues to decline. We expect the rate of new supply growth to continue to fall and hit historic lows. With demand growth, that should result in strong pricing power for hotel owners. Xenia continues to be well positioned with a high-quality, well-located asset base and multiple levers for growth. We expect the capital expenditure projects that we have discussed today to lead to a favorable setup for years to come. And our balance sheet is flexible and strong, which will allow us to take advantage of opportunities that are likely to unfold in the years ahead. That concludes our prepared remarks. And with that, we'll turn the call back over to Tamia for our Q&A session.

[Operator Instructions] Our first question comes from Bill Crow with Raymond James.

Marcel, this might be an unfair question, this might be a tough question to answer because of the seasonality that is really hard to get at. But do you think that -- does your gut tell you that the business transient demand is on par today with where it was in June or say September of last year? Or do you think there's been a little bit of erosion on the underlying demand because of the macro concerns?

I guess no, Bill. On the business transient side, particularly, which is I think what you were asking specifically about, we've actually been seeing good improvement on that. As we talked about, we started seeing some strengthening going into -- particularly later in the third quarter and going into the fourth quarter. And certainly, some of the recent trends that we're seeing on midweek occupancy is pretty promising. So we're actually seeing a little bit more of a traditional mix when you look at day of the week type occupancy, where we're certainly seeing a little bit more strengthening in midweek. So the way you're comparing it to the months that you're talking about last year, I think we're actually seeing some decent improvement there.

And I guess -- the second half of that question, I guess, is what you're seeing on the leisure front. Because currently, there are concerns out there about the pace of demand in some markets like The Keys and some other markets that were so good for the last couple of years. Just kind of highlight what you're seeing out there on the leisure side.

Bill, this is Barry. On the leisure side, we are definitely seeing a continuation of strong demand, even in markets like The Keys. We are seeing in some markets, we're seeing a little bit of softening on the rate side in months that truly outperformed. So for example, January, it was a relatively softer month in The Keys historically compared to February. Over the last couple of years, we've seen January be almost as strong as February in terms of ability to drive rate. So we saw a little softness in February, but then we saw that kind of bounce back in February, again, because we were back to traditionally high demand levels there.

Yes. And then one real quick follow-up, and I'll yield the floor. But is Hyatt providing any sort of financial incentive on the -- either the Aviara renovation or the Scottsdale project?

Not specifically. Clearly, when you think about what's happening there, is that we talked about the fact that we're going to see some disruption there in the short term. Now as you can imagine, that property has been performing very well. So Hyatt certainly was making some good incentive management fees, for example, with the property. So they are -- from an economic standpoint, they are definitely participating from the sense that they clearly will see an impact to their short-term management fees at the property. And going forward, obviously, our bases in the hotel increases, which will set a higher base for incentive management fees going forward. So that's one way that we really look at it to say there is an economic impact to Hyatt here. We've clearly been working with them very closely over the last, say, really 12, 18 months to look at this project and say, what is the right level of investment that we want to make here? And we're very excited about the plan we've come up with and how we think this property will be positioned going forward.

The next question comes from Austin Wurschmidt with KeyBanc.

I was just curious, going back to the Hyatt Regency Scottsdale renovation, was the decision to pursue this up-branding opportunity here kind of a post-COVID opportunity or something that you guys have been evaluating for some time? And as you look broadly across the portfolio, clearly, you've had successes on the renovation front. Are there any other sort of more comprehensive renovation opportunities across any other properties that you'd highlight?

Yes. Thanks, Austin. Yes, this -- it's a great question. I mean it's something that we've been working on for a long time, frankly. And we've owned the property since 2017. So we've had a good run going in [indiscernible] to really understand the property and where we thought the opportunities might be. And we, for a long time, talked about the opportunity to increase the meeting space there to give us a real opportunity to optimize the mix there, get more group business, being able to compress higher rates on the leisure side. So it is something that we have been considering going into COVID, for sure. And COVID overall didn't necessarily change that. What we have seen, obviously, is that post-COVID domestic leisure demand has been extremely strong. So it makes it a little bit harder from a short-term disruption standpoint. But we absolutely look at this and say we want to be able to sustain and grow the cash flows at this property. We think that doing this -- but clearly, we were coming up on a time where we had to do a renovation of the property anyway. It was time to do the cyclical renovation. The room product was getting a little longer in the tooth, and the property overall hadn't really had a comprehensive renovation in a long time. So we felt that this is the absolute right thing to do to really bring this to the next level. And it's obviously something I focused on quite a bit in my remarks, but it's a market that we are extremely familiar with. We've owned this property for a good number of years. Barry and I, when we were at [ CNO ] on hotels and resorts, we actually owned 2 of the luxury hotels that are in the competitive peer set for this hotel. And as a matter of fact, developed of one of those hotels during that time. So it's a market that I would say we probably know more about than any other market [ that ] was in our portfolio. So we're highly confident about what we think is the right thing to do with this asset and positioning it very well for the future.

That's helpful detail. And then how much of the $110 million, I think, of total spend do you expect to hit in '23 versus '24? And assuming a similar economic backdrop, would you expect there to be more or less disruption from this asset next year?

It's about -- roughly it's about -- it's roughly about [ half and half in the sense ]. There's more work that really gets done kind of next year as it relates to the room product and those types of things. And obviously, you spent some of the money upfront in deposits and those kind of things. So it is probably roughly about half and half between this year and next year. Certainly, it's a little early to talk about exactly what the disruption is going to look like for next year. But one of the reasons why we're doing it over this 18-month time frame is that, again, we really worked on this over the last 12 to 18 months to look at, hey, what's the right -- what is the right project to do here. And we got very excited about the various components that we're doing here and b, how do we stage this appropriately to kind of balance both the disruption that we're dealing with and obviously wanted to get this project done as quickly as we possibly can without offsetting the operations too much. So again, it's a little early to talk about next year's disruption, but there's a good amount of disruption in this year just because of the fact that we're going to start working on the meeting space, which is largely limiting Hyatt's ability to really put a lot of group business on the books for the second half of this year. The pool complex that will be going as kind of the first part here, which obviously is going to impact some of the leisure experience at the hotel. So the good thing is it's a seasonal market, right? So part of how we're looking at the [ room ] renovation that will primarily occur next year is that we're going to stage that in an appropriate way to try to limit as much as possible disruption during the busy season and have more disruption taking place during the summer when clearly the overall Phoenix market has a lower occupancy.

That's helpful. And just last one for me. I guess within the context of your RevPAR growth guidance, how did you think about or what's assumed, I guess, for some of the markets that have lagged in the recovery since the onset of the pandemic? The Bay Area, you talked about kind of Portland's first full year of operation. How do we think about sort of that subset of hotels growing again within sort of the overall guidance range that you outlined?

Yes. I mean that's a good question. I mean it's definitely above that range. It varies quite a bit based on market, but the 2 acquisitions that we made more recently, W Nashville and Hyatt Regency Portland, we expect to see outsized growth there. And then some of the markets that have been the slowest to recover, so namely SFO, Santa Clara, we expect to see stronger growth there. And really, that's been -- being offset by the renovation disruption that we've talked about as well as just more moderate levels of growth or no growth in some of the more leisure-oriented assets.

The following question comes from David Katz with Jefferies.

I just wanted to go back. I know you made some introductory comments, but are there any data points or anything you can point to as we progress into this year? I mean, the biggest challenge I assume we're all having is trying to get a sense for what the back half of this year could look like. Can you just talk about that? And I know you've touched on it, but just to revisit what you're baking into your back half guidance.

Yes, sure. I mean as I mentioned in terms of top line for RevPAR, back half, we're assuming it's flat [ this ] year. And the reason is, a, renovations; and b, that how tough the comps are. So that's kind of how we're thinking about the back half. And the -- in sort of a similar level of, I guess, impact based on -- if you look at adjusted EBITDA or hotel EBITDA. So that's kind of how we're thinking about back half of the year.

Which is also part of the reason, obviously, why we have a little bit wider range on guidance historically as I think there clearly is a little bit more uncertainty about the second half of the year, particularly. And again, this is -- we're comfortable with this range that we have provided this morning. And certainly, what Atish talked about are really guiding how we're looking at the balance of the year.

Yes. I mean that was kind of the thrust of my question. Is the flat RevPAR, assuming some kind of modest economic slowdown, is that kind of where the base case sits? What is the underlying base case for that flat?

Well, it's really sort of a similar level to what -- where the economy is right now. We've not really modeled in a slowdown. It's really more a function of the comparison and then the renovations, which do have a more significant impact in the second half of the year than the first one.

Got it. Okay. That's exactly what I was after.

Our next question comes from Michael Bellisario with Baird.

Just a couple more on Scottsdale. Maybe tying together with the renovation and potential acquisitions. Scottsdale has obviously a lot of [indiscernible], a lot of disruption. Is maybe your decision there to pull the trigger now indicative at all of maybe the lack of product or acquisition opportunities you're seeing at present?

Well, the one doesn't rule out the other. I mean, we clearly have a good amount of dry powder still available based on liquidity that Atish outlined, but if we see attractive opportunities on the acquisition side that we can absolutely still execute on those. And something like Scottsdale was really done with a really long-term view. And as I pointed out, it's something that didn't just come about over the last couple of months. Obviously, I've [indiscernible] to some significant ROI projects for a few earnings calls during the course of last year. And this was obviously a very significant one that we've been working on for a long time. So I wouldn't necessarily -- again, like I said, one doesn't preclude the other. But we certainly look at this as a very attractive use of our capital, given alternative uses of our capital. And especially in today's environment, clearly, we are not seeing a lot of really exciting and attractive acquisition opportunities. So we're happy being patient on that side, like I've indicated really over the last couple of earnings calls as well. I mean, it hasn't changed much. We are not seeing a great, deep pool of potential attractive acquisition targets for us, but we're obviously continuing to look for those and are still optimistic that as we get deeper into the year, that there might be some more opportunities on that side.

Got it. And then I don't think you gave it, but what might have been the incremental, I guess, maybe the base case renovation cost for kind of typical cyclical renovation at that property? Trying to think about what the incremental cost is for the renovation that you're doing there.

No, it's hard for me to give you an exact number on that because it can be such a wide range, right? I mean if you just say, look, we're just going to do a very basic room renovation. Is that really the right thing to do as opposed to also touching common spaces, restaurants, meeting space and all those type of assets. So we believe that -- I mean, clearly, there's a true additional cost as it relates to the expansion of the meeting space, which we think is a very important component of this overall project. So there's clearly a true additional cost there. There clearly is some additional costs as it relates to going to the standards of a Grand Hyatt over what currently is at a Hyatt Regency. But when we looked at those alternatives, we really looked at it across a really wide spectrum of various levels of cost and what we thought it would do for us on the return side. So it became pretty obvious and clear to us that going down this path and being able to get the luxury branding through Grand Hyatt, doing all the things we're planning to do, especially on the food and beverage side, creates much more interesting and exciting opportunities and get higher and more spreaded projects and products to sell and get us the right appropriate returns on.

Got it. Fair enough. And then just last one for me for Atish. Could you quantify that $30 million year-over-year headwind maybe for each of the 3 buckets you gave, asset sales, cancellation fees and renovation disruption?

Yes. So asset sales is $6 million. We put that in the release. Cancellation and attrition fees, last year, we earned $18 million, typical run rate would be closer to $9 million. So that's about a $9 million headwind. And then the balance is the renovation disruption, which is the $15 million that we called out in the release as well. So that together gets you to the $30 million.

And there's obviously a number of renovation projects in there over and above Scottsdale, which we've obviously focused on quite a bit. But we do have room renovation at Grand Bohemian Orlando, room renovation at Canary Santa Barbara, renovations [indiscernible], renovations we're doing at Monaco Salt Lake. So those are kind of the bigger projects that we are rolling a [ $15 million disruption there ].

The next question comes from Aryeh Klein with BMO.

Maybe just on the W Nashville. You have a few more months under your belt here. And EBITDA, I guess, came in at the adjusted expectation of $12 million. How are you thinking about that asset this year and kind of what your expectations are?

Aryeh, it's Barry. Thanks for the question. I would say that each month, we're kind of incrementally seeing more and more progress toward what the goals are. Obviously, we're happy to have hit our revised number, but I think we had a lot of confidence in that. What we're looking at for this year is continuing what we've done historically, which is looking at really changing the mix of the hotel, so it's more group focused. And we spend a lot of time and effort focused with the Marriott team on how to best position the hotel by season. And it's a different hotel in January and February than it is in April and May. It's a different hotel on weeknights than it is on weekends. And really, we spent a lot of time and focus on that. We've done some -- Marriott's done some reenergizing with the food and beverage team and they focused on food and beverage and really focused rather than overall really dig in and focused outlet by outlet on where the opportunities are, what's worked, what hasn't worked and how does each outlet get positioned as the best outlet kind of within its class within the local market.

Got it. And then maybe just on the expense side, can you talk about how you're thinking about margin this year? Marcel, I think you've always been a little hesitant to provide long-term savings targets. But is there anything on that front from a long-term savings standpoint where you think -- still think there's some opportunity?

Yes. I'll go back to what I've said about this before. I mean, we were always very hesitant about that because it was extremely unclear at that point, what's kind of inflationary pressures we're going to be dealing with. Where you hit your mix of business is really going to change from what it was pre-COVID. The second [ phase ] obviously has a lot to do with it. So that's why we were always hesitant. We did not believe you could just look at it [ statically ] and say, "Hey, we're going to be x basis points higher." And I think that's proven to be the case. So I think we were appropriately hesitant to do so. And if you look back, you can just look at the last few quarters, right? I mean we were up 17 basis points in the fourth quarter on relatively minor RevPAR increases over '19 But that shows you obviously that we are controlling costs fairly well to be able to actually increase your margin a little bit even when you see firstly no RevPAR growth. And for most of us who can remember the days before COVID, the [ years ] leading into COVID, we're having similar issues, obviously, where it was harder to drive RevPAR and drive rates, which made it very difficult to continue to move margins up. So the fact that we're still seeing some margin improvement, I think, is a testament to how we are able to control costs and how we're able to run the hotels a little bit more efficiently. But clearly, there continues to be pressures, and we've talked about those. We talked about the labor cost increases. We've talked about utility cost increases. And obviously, we've built in our expectations as it relates to those into the guidance that Atish went through.

Yes. I mean just more specifically, those items, utilities, real estate taxes and insurance, those 3 are a 50-basis point headwind for us in 2023 relative to last year. And then the cancellation and attrition fees that I talked about are a pretty significant headwind as well, nearly 100 basis points. And then obviously, we've got the renovation disruption. So we do expect margins to contract over the course of the full year, and that's included in our guidance that we gave.

Our next question comes from Tyler Batory with Oppenheimer.

This is [ Jonathan ] on for Tyler. I wanted to follow up on the transaction discussion. Marcel, I think you said you were optimistic it would improve. I'm curious if you could provide additional color there or sort of the house view on the acquisition environment as we move throughout the year?

Yes, sure. Obviously, like I said, we continue to build a pipeline, look at a pipeline to see what's out there, just continues to be fairly shallow as it relates to assets that we think would be strategic fit for us, and it would be good growth drivers for us, especially with pricing expectation that still is out there. We do think that as we get deeper into the year, that there just might be more product that comes to market, and I think that's absolutely the view that most of the brokerage community has too, if -- most of the communication that we have with the brokerage community, there seems to be somewhat a consistent view of the fact that the market isn't terribly deep right now, but that there is an expectation of some more product coming to market as we get into the second half of the year. And some of that is obviously going to be driven by what's the overall economic climate, what does the interest rate environment look like, but there certainly will be a number of owners that are looking at refinancing situations where they may just say, look, it might be an attractive time to potentially sell an asset as opposed to having to refinance at significantly higher rates than where they're currently financed. So that's really our view as well at this point, that we think there should be an environment coming up that will be more conducive to more product being out there, us having more choice and more of an ability to look at what's really attractive to us and will be additive to our portfolio.

Very helpful. And then given your [ guidance ] strong liquidity position and strong balance sheet, are there any markets or locations that you don't currently have exposure to that you'd like to get more exposure to? Or anything that would make sense at this point.

Well, we're going to remain -- obviously, we're going to stick to our strategy as far as what works well for us. And clearly, we've had more of a focus on [ Sunbelt ] locations, and I don't see that changing over time. I think we like those markets from a long-term perspective. We like the overall market dynamics. And there are still some markets that we're not in there, some markets where we are, where we could still increase our exposure to some extent. But we've -- I have always been hesitant to really call out specific markets because we want to be opportunistic, and we want to look at assets that we think are good potential fits for our portfolio without really kind of putting ourselves too much in a box of any specific market that we're targeting. So that, again, goes back to hopefully having a greater opportunity set that allows us to look at a little bit wider range of markets, and that gives us a chance to say, okay, this is a market that we feel really confident about and where we like the current dynamics. And again, it could be a market where we're not, it could be a market where we are already where we have some exposure. Clearly, there are a few markets where we have a lot of exposure already. So it's unlikely we'll expand on those. But we like having the kind of geographic diversity that we've always had throughout our history.

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

Quick question on the Grand Hyatt upgrade. Given the amount of capital that you'll have in that asset, do you have any protection from Hyatt that they will not introduce a Park Hyatt into that market?

No, we obviously -- Bill, as you know, we don't [ like ] to get too specific as it relates to any kind of particulars on some of the agreements that we have in place with our operators. If you think about what is -- let me answer it in a little bit different way because I think part of your question is also as it relates to what is the right positioning for the resort in and of itself, right, that we clearly looked at. We think there's an opportunity to upbrand this hotel. We think it can play better in its luxury competitor set by going with a brand that has a little bit more cachet and is appropriate for a luxury resort and felt that Grand Hyatt is the right branding here for a number of reasons. I mean the size of the resort as opposed to Park Hyatts that are generally a little bit more intimate, a little bit smaller, having this kind of size, this kind of meeting space, being able to attract the right kind of customers that we're looking for, having the type of expense structure in place that we want to have in place with this asset. And as you know, we obviously have a wide range of assets, including within the Hyatt brand, where we do have the Park Hyatt Aviara, which is smaller from a [ room's ] perspective, where it's more appropriate to have that brand than here. And the Grand Hyatt brand is something that -- there's obviously a mix of those assets throughout their portfolio, too. Now there's obviously a few more, they're urban focused. If you think about the resort locations that Grand Hyatt has, both domestically and internationally. You really have to think more about like -- and that's when the outstanding resort in [indiscernible], for example, that has a Grand Hyatt resort that is probably a prototypical luxury resort. It's more about thinking about it in that context on why we think Grand Hyatt is the right branding for this asset.

Okay. I just -- it feels like that's a market where Park Hyatt would be a good fit. So that was really what spurred my question, but all right. Terrific.

Thank you. There are no further questions at this time. I will now pass it back over to Marcel Verbaas for closing remarks.

Thanks, Tamia. Thank you all for joining the call today. We always appreciate the questions and look forward to updating you again next quarter.

This concludes the conference call. Thank you for your participation. You may now disconnect your line.