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Text: If you do not yet have a copy, you can access them on our website.
We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today are Doug Pasquale, Chairman and Interim Chief Executive Officer; Bryan Giglia, Chief Financial Officer; Robert Springer, Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer.
On todays call, Doug will discuss our recent value-enhancing hotel transactions and provide his thoughts on the companys near-term priorities and objectives.
Bryan will then discuss the current operating environment and recent trends in our business.
And finally, Ill provide a summary of our current liquidity position and a recap of our prior quarter financial results.
As many of you know, I have been affiliated with Sunstone for quite some time now, having joined the Board in 2011 and taking on the role of Chairman in 2015.
During my tenure, I have facilitated the management teams efforts as they repaired the companys balance sheet and upgraded its portfolio following the global financial crisis, and most recently, as we navigated the unprecedented challenges brought on by the pandemic.
Now as interim CEO, Ive had the opportunity to become increasingly involved in the day-to-day operations of the company.
With that enhanced perspective, Im more confident than ever that Sunstone has the portfolio, the balance sheet and the management team to deliver incremental value to its shareholders and do so on a more accelerated basis.
As a first step in this process, we announced a series of hotel transactions yesterday that reflect our renewed commitment to value creation through the sale of assets, which are no longer consistent with our strategy, the selected disposition of core assets when pricing is compelling and through the acquisition of long-term relevant real estate.
Going forward, you should expect that Sunstone will do more of the same as we further position the company for growth by actively recycling capital and more effectively utilizing leverage in our tax attributes while still maintaining a solid balance sheet with capacity and flexibility.
Overall, I am very pleased with the progress we have made in the first two months of my tenure, and I look forward to continuing to work with the management team to unlock further value for our shareholders.
When I assume the interim CEO role, I made it clear that my tenure in this position would be for a year or less and that the Board was committed to identifying a permanent CEO, who would further advance our existing strategy.
The search committee was established in tandem with my appointment and the search process is underway.
While we intend to conduct an efficient search, we will be thoughtful and farsighted.
We will not rush the process and we will do everything possible to ensure the right new leader is selected.
We expect to have an update as part of our next quarterly call.
And to share some encouraging recent trends we are seeing across our portfolio that give us reasons to be more optimistic as we head into the final months of the year and into 2022.
Ill start with a review of the third quarter operating results.
which, as Doug just mentioned, materially exceeded our expectations with EBITDA more than doubling the prior quarter and marking the return to positive quarterly FFO for the first time since 2019.
I will provide an update on the current operating environment and forward booking trends, which point to continued growth in the fourth quarter and into 2022 despite the effects of the Delta variant.
Last, I will provide some additional details on the exciting and value-enhancing hotel transactions that were announced yesterday.
So lets begin with the third quarter operations, which came in stronger on both the top and bottom lines.
Total revenue was $167 million, an increase of 43% from the second quarter, driven by a nearly 10-point sequential increase in occupancy at an average rate for the comparable portfolio that not only grew 13% from the second quarter of 2021, but was also just above the third quarter of 2019.
These strong results were primarily the result of strong leisure demand over the summer vacation season that peaked in July and then moderated in August and September, partly as a result of typical seasonal patterns but also due to a short-term pause in travel demand due to the spread of the Delta variant.
While occupancy increased to nearly 55% and benefited from growth in all segments, transient demand remained a standout, with room nights increasing 27% compared to the second quarter.
Our total portfolio third quarter average daily rate was $30 higher than the second quarter and even when excluding Montage Healdsburg, which ran a very robust average daily rate of nearly $1,250, our comparable portfolio ADR of just over $248 in the third quarter came in higher than 2019 levels.
A strong desire for leisure travel and a healthy U.S. consumer contributed to strong demand in certain markets and allowed our operators to push rates far beyond pre-pandemic levels.
We achieved meaningful rate growth in Key West, Orlando, New Orleans and Wailea.
In fact, Oceans Edge saw rates increase in astonishing 103% as compared to 2019 and Wailea Beach Resort vested their pre-pandemic rate by 40%.
In addition to a stronger rate performance, out-of-room spend also increased with food and beverage revenues higher by 79% in the third quarter as compared to the second quarter, representing a 47% increase in food and beverage spend per occupied room.
Other hotel revenues also increased as higher occupancy drove increased destination fees, spa and parking revenues.
Banquet and catering contribution per occupied group room increased over the second quarter by $96 and achieved approximately 70% of 2019 levels.
Combined with stronger ADR, the growth in nonrooms revenue generated a quarterly comparable TRevPAR of $207, a 41% increase from $146 achieved in the second quarter.
We have been focused on working with our operators to deliver a safe and enjoyable guest experience while looking for ways to achieve efficiencies and permanent expense reductions.
Year-to-date, we have eliminated nearly $11 million of costs from our hotels, which we believe will be lasting savings and can be sustained, even as business levels and occupancies increase.
We recognize that there is a need to balance appropriate service levels and amenities with pricing and profitability, and there will not be a one-size-fits-all approach to margin enhancement at every hotel.
And so we are continuing to work with our operators to identify creative ways to drive profitability across the portfolio.
During the quarter, our comparable hotels generated hotel EBITDA margins of 24.3%.
While this is below the low 30% range we maintained historically, delivering mid-20% margins at a portfoliowide occupancy of just below 55% is a significant accomplishment and gives us confidence that we will be able to achieve higher stabilized margins once demand returns to a more normalized level.
The combination of higher rates, stronger nonroom revenue, permanent expense reductions and other cost controls contributed to third quarter EBITDA that exceeded expectations and represented a more than twofold increase over the prior quarter.
While strong demand for leisure travel seems to be well established at this point, in fact, Saturday of Labor Day weekend was our portfolios highest demand night of the year, with occupancy of 84% at an average rate of nearly $275.
We are also seeing positive trends in both group and business transient demand that we expect will accelerate as we move forward.
Lets take a look at each of these segments in a bit more detail, starting with group.
While total group room nights for the quarter increased only marginally from the second quarter to 82,000 nights.
What is more important to note is that the group activity we saw in the third quarter was increasingly comprised of more traditional corporate and association events as opposed to the rooms-only and event-driven group business that composed much of the demand in the first two quarters of the year.
Corporate group activity in the quarter grew nearly 30%, and the association business was more than five times higher than the previous quarter and generated 24,000 room nights.
The Renaissance Orlando, Hilton San Diego and JW Marriott New Orleans, had a substantial increase in association and corporate group business and the Wailea Beach Resort experienced a meaningful return of incentive business, with 8,000 incentive room nights at a very attractive rate of nearly $600 compared to 6,700 room nights and a rate of $400 in the same quarter of 2019.
The Delta variant impacted group business later in the quarter as our hotels experienced increased cancellations, a decrease in group lead volume and a decline in overall group production.
The majority of the cancellations occurred in August and coincided with the peak in case counts witnessed in late summer from the spread of the Delta variant and were skewed toward corporate group as opposed to association business.
Approximately 9% of our third quarter group room nights canceled, which were primarily for events in August and September, and approximately 16% of our fourth quarter group rooms canceled, which were primarily for events in October.
We believe these headwinds from the Delta variant are largely behind us as group demand and lead volume began to reaccelerate post Labor Day and have continued into the fourth quarter.
In fact, we expect the fourth quarter production to be the strongest of the year.
For our five large group hotels, which make up 2/3 of our fourth quarter room nights, 77% of our forecasted group room nights have already been picked up.
Moving on to transient, which accounted for roughly 75% of our total room nights in the third quarter.
Total transient rate for the third quarter came in at $285 compared to $261 in the second quarter, an increase of more than 9%.
Even more encouraging was the increased contribution of business travel to the overall transient demand.
The number of special corporate rooms increased 103% from the second quarter with rates higher by 20%.
Several of our hotels, including the Hyatt San Francisco, Boston Park Plaza and Hyatt Chicago witnessed a meaningful acceleration in special corporate room nights during the quarter.
While our third quarter business transient volume was only 50% of pre-pandemic levels, future transient booking pace continues to grow every week and we expect this to accelerate into 2022 as companies increasingly return to the office and business transient travel becomes more widespread.
As I mentioned earlier, our operators have been able to aggressively push rates in response to very healthy leisure demand.
We saw strength in leisure rates at hotels across the portfolio, including Key West, Orlando, New Orleans, Napa, Sonoma and Wailea.
The ability to achieve premium pricing has been most evident in our resort properties with Montage Healdsburg achieving a rate of approximately $1,250 for the quarter, and Oceans Edge in Wailea Beach Resort seeing rate increases of 103% and 40%, respectively, compared to the third quarter of 2019.
This level of rate growth should also translate into profitability that exceeds our underwriting at Montage and that outpace pre-pandemic levels at Oceans Edge and in Wailea.
Given the substantial pricing increase our operators have implemented, we are closely monitoring guest feedback to ensure our satisfaction scores remain competitive and that we are balancing near-term profitability with each hotels long-term positioning.
Wailea continues to command a strong TripAdvisor rating despite a $185 higher rate than third quarter of 2019, an impressive achievement, especially given its luxury peers.
As we move into the fourth quarter, were encouraged by what we are seeing for October.
Our preliminary results for the month show a reacceleration of demand with RevPAR of approximately $150 made up of occupancy of 57% and a $264 average daily rate.
October RevPAR is second only to our peak month of July and is above August and September by nearly 10% and 14%, respectively.
Given the current trends, we expect a strong finish to the end of the year, with November and December benefiting from increased levels of business transient and group demand and continued ability to drive strong leisure rates during the holiday season.
Shifting to our capital projects.
We invested $25 million into our portfolio in the third quarter with a focus on enhancing the quality and future earnings potential of the portfolio.
In July, we completed work on Boston Park Plazas newest meeting space, The Square, a 7,000 square foot indoor space that will give the hotel incremental capacity to host in-house group business and reduce its reliance on citywide events.
At the Hilton San Diego Bay front, we completed a total redesign of the food and beverage options, including an addition of a market concept that will provide a better guest experience at a higher profit margin.
Additionally, in San Diego, we converted unused space into 6,800 square feet of new, high-quality meeting space that looks out onto the San Diego Bay.
During the quarter, we also continue to make progress on the transformation of the soon-to-be rebranded Westin Washington, D.C. The ballroom and meeting space renovations will be completed by the end of the year and work on the guest rooms and lobby will occur in 2022.
Once the meeting space is completed, the hotel will be able to host group business next year while the rooms renovation is completed.
We are pleased with the reception, the in-process conversion is receiving from meeting and event planners, and look forward to the incremental growth the hotel will generate as it captures higher rates and incremental share under the Westin brand.
Moving on to transaction activity, as Doug noted, yesterday, we announced three transactions that enhance our portfolio quality, strengthen our balance sheet and provide additional capacity for future growth and acquisitions.
First, we completed the sale of the 348-room Renaissance Westchester for gross proceeds of approximately $19 million.
This hotel was a noncore asset in a challenged market that lacks sufficient demand to Marriott reopening after operations were suspended at the onset of the pandemic The net proceeds from the sale, after the payment of termination fees and severance costs, was approximately $11 million and the disposition removes an asset that was expected to be a drag on cash flow and growth going forward.
Next, we are under contract to sell the 340-room Embassy Suites La Jolla for $226.7 million or approximately $667,000 per key.
This is a tremendous outcome and is a perfect example of the embedded value that can be generated from the ownership of long-term relevant real estate.
In addition to being a high-quality Embassy Suites and a productive cash generator, the hotel sits on phenomenal real estate.
We were able to capitalize on its highly desirable location and sell the hotel to a buyer that will be able to better optimize the entire parcel.
We expect the sale to close during the fourth quarter.
Net proceeds after the mortgage loan are expected to be approximately $165 million.
Finally, we are excited to announce the acquisition of the Four Seasons Resort Napa Valley.
This one-of-a-kind asset located on the Famous Silverado Trail is a terrific example of long-term relevant real estate.
We are acquiring the resort for a gross purchase price of $177.5 million, a meaningful discount to its development cost.
In addition to the 85-room resort and its abundant event space and full suite of luxury amenities, the acquisition price also includes nearly 4.5 acres of vineyards and the Elusa Winery along with the inventory of prior wine vintages.
The investment in the Four Seasons Napa Valley is the perfect complement to our previous Wine Country acquisition, Montage Healdsburg, which we acquired in April and is already surpassing our expectations.
Between the Four Seasons and the Montage, we will have approximately 10% of our asset value in one of the most supply constrained sought after and highest-rated leisure destinations in the country.
We will own the two premier assets and establish a market-leading position in Wine Country with ownership of approximately 24% of the luxury room inventory and 32% of the luxury event space.
The purchase of the Four Seasons Resort in Napa Valley is consistent with our stated strategy of acquiring long-term relevant real estate, in the early phases of a cyclical recovery and its addition further elevates our overall quality and earnings potential of our portfolio.
We expect Four Seasons to contribute meaningfully to our per share future earnings as we deploy more of our balance sheet capacity and benefit from the strong demand for leisure travel.
To sum things up, third quarter results exceeded expectations as a result of continued strong leisure demand, steady improvement in business transient travel and an improving group mix.
Although expectations for the fourth quarter have moderated due to group cancellations related to the Delta variant, we have seen demand reaccelerate in recent weeks.
And based on forward-booking information, we are optimistic that these trends will continue in the fourth quarter and into 2022.
Additionally, our investments both internally and externally will provide additional growth as travel demand moves closer to pre-pandemic levels.
Furthermore, we are in the enviable position to use our strong balance sheet and debt capacity to grow the company and to create value for our shareholders.
As of the end of the third quarter, we had approximately $222 million of total cash and cash equivalents, including $42 million of restricted cash.
In addition to cash on hand, we also maintained full availability on our $500 million revolving credit facility, which equates to over $700 million of total existing liquidity.
We are excited to close on the acquisition of Four Seasons Resort Napa Valley in the fourth quarter and expect to fund the transaction through a combination of cash on hand and from borrowings under our credit facility.
As Bryan mentioned earlier, net cash proceeds from the sale of Embassy Suites La Jolla are expected to be approximately $165 million after the buyers assumption of the existing $57 million mortgage loan.
We expect the sales to also be completed in the fourth quarter.
The quarterly results reflect an improving operating environment driven by continued strong leisure demand, an increasing amount of commercial transient volume and improving mix of group business.
Third quarter adjusted EBITDAre was $35 million and third quarter adjusted FFO was $0.10 per diluted share.
These results surpassed our previous expectation and marked the return to positive quarterly FFO for the first time since the end of 2019.
During the third quarter, we recognized $1.6 million of restoration expense and an impairment charge of $1 million as a result of damage incurred at our two hotels in New Orleans following Hurricane Ida.
The Hilton New Orleans, St. Charles sustained the bulk of the damage, and we are working with our insurers to identify and settle a property damage claim, but we expect that future losses from the restoration work at this hotel will be mitigated by the propertys insurance deductible of approximately $3 million.
Now turning to dividends.
We have suspended our common dividend until we return to taxable income.
Separately, our Board has approved the quarterly distributions for each of our Series G, H, N, and I preferred securities.
And with that, we can now open the call to questions.

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compname reports q3 adjusted ffo per share $0.10.
q3 adjusted ffo per share $0.10.

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