Xenia Hotels & Resorts, Inc. (NYSE:XHR) Q3 2022 Earnings Conference Call November 2, 2022 1:00 PM ET
Company Participants
Amanda Bryant – VP, Finance
Marcel Verbaas – Chairman & CEO
Barry Bloom – President & COO
Atish Shah – EVP, CFO & Treasurer
Conference Call Participants
Bryan Maher – B. Riley Securities
Michael Bellisario – Robert W. Baird & Co.
Dori Kesten – Wells Fargo Securities
Stephen Grambling – Morgan Stanley
Aryeh Klein – BMO Capital Markets
Austin Wurschmidt – KeyBanc Capital Markets
William Crow – Raymond James & Associates
Jonathan Jenkins – Oppenheimer
David Katz – Jefferies
Operator
Good afternoon, ladies and gentlemen. Thank you for attending today’s Xenia Hotels & Resorts Q3 2022 Earnings Conference Call. My name is Tia, and I’ll be your moderator for today’s call. [Operator Instructions].
I would now like to pass the conference over to your host, Amanda Bryant, VP of Finance. You may proceed.
Amanda Bryant
Thank you, Tia. Good afternoon, and welcome to Xenia Hotels & Resorts Third 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 on our quarterly performance and recent transactions. Barry will follow with more details about our operating trends and capital expenditure projects. And Atish will conclude our remarks with an update on guidance and our balance sheet. 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 this morning, along with the comments on this call, are made only as of today, November 2, 2022, 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 loss and definitions of certain items referred to in our remarks in this morning’s earnings release.
The third quarter property-level portfolio information we’ll be speaking about today is on a same-property basis for 32 hotels. This excludes Hyatt Regency Portland and the Oregon Convention Center and W Nashville. An archive of this call will be available on our website for 90 days.
I will now turn it over to Marcel to get started.
Marcel Verbaas
Thanks, Amanda, and good afternoon to all of you joining our call today. As we reported this morning, we are seeing further momentum across our portfolio as business transient and group demand continue to recover. Overall business picked up meaningfully in mid-September, providing encouraging evidence of the seasonal transition in our business from primarily leisure demand to a more traditional mix of leisure, corporate transient and group demand.
RevPAR for the quarter declined 2.6% compared to the same period in 2019. Overall demand accelerated in September, with RevPAR growth of 2.7% as compared to 2019, marking a reversal from modest RevPAR declines in July and August, driven by improved occupancy that significantly closed the gap to 2019 as compared to prior months.
Average daily rate growth in the quarter was a solid 15.6% as compared to 2019, offset partially by about 12 points lower occupancy as compared to the third quarter of 2019. We reported a net loss of $1.7 million for the quarter. Adjusted EBITDAre was $53.8 million, and adjusted FFO per diluted share was $0.31. Same-property hotel EBITDA of $52.2 million represented an increase of 1.4% from the third quarter of 2019, marking the second consecutive quarter of growth relative to 2019.
Third quarter results were mixed compared to our internal expectations. Same-property RevPAR matched our forecast for the quarter, albeit slightly more weighted towards ADR than occupancy. Same-property hotel EBITDA margin continued to show improvement over 2019, increasing by 48 basis points for the third quarter, which followed an outsized 365 basis point improvement as compared to 2019 in the second quarter. The seasonal drop in margins that typically occurs in the third quarter relative to the second quarter was greater than we had projected.
Third quarter margin gains were more subdued due to several factors, including hotels being more fully staffed to meet anticipated customer demand, and higher expenses in areas such as utilities. Barry and Atish will provide additional detail on our third quarter operations and our expectations for the balance of the year in their prepared remarks.
Regarding results of some of our newer assets, we are pleased that Park Hyatt Aviara continues to perform in a highly encouraging manner. The transformational renovation of the resort has allowed the property to significantly increase rates compared to those achieved pre-acquisition, as evidenced by our estimated October ADR increasing more than 50% compared to October 2019. We are forecasting that the property will achieve approximately $18 million in EBITDA in 2022, which is already within the stabilized range we’ve projected upon acquisition. However, we believe that significant upside remains as the property has not yet achieved its expected stabilized occupancy.
As the operating team continues to optimize its sales strategy and demand mix, we believe substantial embedded growth should be unlocked in the years ahead. Barry will provide an update on the final components of the renovation, which we believe should further enhance high stability to optimize results at the resort.
Meanwhile, Hyatt Regency Portland continues on its path towards stabilization as it benefited from a number of citywide groups and events in the third quarter as Portland’s reopening is gaining momentum. The property is making good progress, building its book of group business, with group pace for 2023 as of the end of the third quarter exceeding the pace for 2022 at the same time last year by over 20%. The property’s excellent physical condition, as it’s still essentially new hotel, and its differentiated locations around by significant demand generators, such as the Oregon Convention Center and the Moda Center, continues to position us well to grow business trends in the leisure business and top of the group business that we expect will be a significant driver of overall demand.
W Nashville continues to ramp in its first full year of operations, with third quarter results that were softer than projected, primarily because of weaker-than-expected summer occupancy and food and beverage revenues. Importantly, both our asset management team and the hotel’s operating team are continuing to learn the seasonality of the market in general and the hotel in particular, and important lesson were learned as it relates to the optimal group and transient segment mix and rate strategy.
The property also continues to work on optimizing the operations and marketing of its high-quality and distinctive food and beverage amenities that we expect will benefit us in the months and quarters ahead. As with many other assets in our portfolio, we are encouraged by recent demand trends, as evidenced by the hotel achieving RevPAR of approximately $320 in October. We continue to be strong believers in the Nashville market and the hotel’s ability to capture more than its fair share, due to its extensive and high-quality facilities. Nashville continues to be an exciting growth market, as further evidenced by the recent announcements of the agreement to build a new multifunctional stadium with an expected cost of more than $2 billion that will be the new home of the Tennessee Titans.
We believe both Hyatt Regency Portland and W Nashville will be meaningful growth drivers in the years ahead, and we remain confident that both hotels will achieve the stabilized EBITDA we expected with each of these acquisitions.
Turning to more recent portfolio-wide trends. We are encouraged by the significant improvement we saw in business transient and group demand starting in the second half of September and continuing through October. We successfully transitioned from primarily leisure demand field recovery to a more traditional mix of leisure, business transient and group demand across our portfolio.
Based on preliminary results, October RevPAR was approximately $196, which was in line with October 2019 and 35% higher than October of last year. Occupancy was approximately 71%, and ADR was up approximately 13% over 2019. The pick up in business transient and group translated into higher midweek occupancy, with our portfolio consistently achieving occupancy greater than 80% on Tuesday and Wednesday nights in recent weeks.
Now turning to transaction activity. In the third quarter, we entered into 2 separate agreements to sell 2 of our assets for a combined sale price of nearly $100 million. In late October, we sold Bohemian Hotel Celebration in Celebration, Florida, for $27.75 million or approximately $241,000 per key. We believe it was an opportunistic time to sell this hotel given its small size, the current investment appeal for the leisure markets and a significant upcoming required renovation.
We also entered into an agreement to sell Kimpton Hotel Monaco Denver for $69.75 million or approximately $369,000 per key. This transaction is expected to close before the end of the year. These 2 dispositions are consistent with our strategy of monetizing assets that we do not believe to be long-term strategic drivers for our company, while continually improving quality and growth profile of our portfolio. We maintain a strong presence in both the Orlando and Denver markets with existing high-quality assets. And we may make additional investments in these markets if appealing opportunities arise, including through internal ROI investments, such as the comprehensive renovation we are currently undertaking at Grand Bohemian Orlando.
Meanwhile, the nearly $100 million in proceeds will improve our already strong liquidity position and provide us with increased balance sheet flexibility. We initiated both of these disposition processes earlier in the year and are pleased with the pricing in both transactions, despite the recent uncertainty in overall economic conditions in general and financing markets in particular.
On a combined basis, the sale prices for both properties equated 15x 2019 hotel EBITDA and 17.1x trailing 12-month hotel EBITDA through September 2022. We believe that these are very attractive multiples, particularly in light of potential alternative uses for our capital. Going forward, we believe we are well positioned to remain opportunistic as it relates to potential on-strategy acquisitions, and we continue to evaluate a number of significant ROI opportunities within our existing portfolio that we believe could be meaningful drivers of earnings growth in the years ahead.
With that, I will turn the call over to Barry, who will provide additional details on our third quarter performance and an update on our capital expenditure projects.
Barry Bloom
Thank you, Marcel, and good afternoon, everyone. For the third quarter, our 32 same-property portfolio RevPAR was $159.06 based on occupancy of 64.2% and an average data rate of $247.74. As Marcel mentioned in his remarks, the same-property portfolio RevPAR decreased by 2.6% in the quarter as compared to the same period in 2019. The quarter ended on a high note, however, with September same-property RevPAR growth of 2.7% compared to 2019. This compares to RevPAR declines in July and August of 4.1% and 6.5%, respectively, as compared to 2019. September strength was driven by a notable pick up in occupancy beginning in the middle of the month, consistent with expected seasonal patterns in business transient and group and generally coincided with a marked increase in return-to-office and return-to-business travel. Overall, September occupancy of 67.2% was a post-COVID record relative to 2019, with occupancy down just 687 basis points.
Of our 32 same-property hotels, only 4 achieved higher average data rates in the third quarter of 2022 than they did in the third quarter of 2019. Average daily rates in the quarter increased 15.6%. We are obviously pleased to see continued pricing strength and are optimistic regarding corporate and group rates, particularly as we achieve higher mid-week occupancies in a number of our urban and suburban markets, including San Francisco and Dallas, on Tuesday and Wednesday nights, providing significant rate compression opportunities.
We continue to see significant continued rate strength in our resorts and our drive to leisure markets, with RevPAR for the quarter compared to 2019 up 41% at Park Hyatt Aviara, 34.5% at Kimpton Canary Santa Barbara, 31.8% at Royal Palms, 27.1% at Hyatt Centric Key West, and 26.8% at Hyatt Regency Grand Cypress.
As Marcel noted, our business mix shifted after Labor Day to reflect more group and corporate transient business. In the quarter, our group business benefited from solid in the quarter, for the quarter bookings and double-digit rate growth, resulting in group rooms revenue nearly fully recovered to the third quarter of 2019 levels. Our performance reflected healthy demand from corporate groups, particularly at our larger group-oriented hotels in Orlando, Scottsdale, San Diego and San Francisco.
We remain optimistic on the recovery in corporate transient business, which notably improved in September. This trend has continued to strengthen in October. RevPAR growth in the third quarter of 2019 remained significantly impacted at Marriott SFO down 29.2% for the quarter, and Hyatt Regency Santa Clara down 36.5% for the quarter. However, RevPAR compared to the third quarter of 2021 was up 90.9% and 158%, respectively.
In addition, our managers continue to point to improving corporate transient business fundamentals and expect this trend to continue as negotiated corporate rates are still on track to increase in the high single or low double digits next year.
Now turning to profit. Third quarter same-property hotel EBITDA was $52.2 million, an increase of 1.4% on a total revenue decline of 0.7% compared to the third quarter of 2019, resulting in 48 basis points of margin improvement. Hotel EBITDA margin grew modestly in the quarter and was impacted by a combination of several onetime and some ongoing factors, including labor and utility costs.
Let me expand a bit on labor, which we believe will be an ongoing factor on the margin side for the foreseeable future. As we identified in the second quarter, we achieved somewhat outsized margin expansion as a result of seasonally high revenues, despite our managers’ challenges in fully staffing our hotels.
During the third quarter, our operations were successful in filling many open positions. We’re able to staff up to meet the strong recovery in demand we have seen in September and October. Some of this labor was hired and trained by our operators early in the third quarter, which put pressure on margins as our hotels continue to return to a more normalized level of guest service and amenity offerings.
While most of our hotels are operating at staffing levels between 90% and 95% of pre-COVID levels, increasing wage costs resulted in labor costs being nearly equal to 2019 levels in the rooms department, the largest operating department in our hotels, despite growing overall margin by just 48 basis points. Labor costs in the rooms department were generally well controlled, labor costs up to 0.3% compared to the third quarter of 2019 on a revenue decline of 2.6%. In the food and beverage department, labor costs were down 4.3% on a revenue decline of 2%.
Fixed departmental staff increased significantly during the quarter, particularly in sales and marketing, where our hotels have been aggressively restaffing positions in response to significant increases in group leads. This resulted in a 9.2% increase in labor cost in the department for the third quarter as compared to the second quarter. Our hotels also had success in bringing back personnel in their repairs and maintenance departments, resulting in a 5.8% increase in labor costs between the second and third quarters.
Utility costs continue to increase and are typically much higher in the third quarter than in the second quarter within our portfolio. Total utility costs were 20.8% higher in Q3 than in Q2 and were 14.5% higher than the third quarter in 2019.
Turning to CapEx. During the quarter and year-to-date, we invested $18.8 million and $40.7 million in portfolio improvements respected. At Park Hyatt Aviara, the comprehensive renovation of the golf course that began in the second quarter is now substantially complete. We continued planning work on a significant upgrade to the resort’s spa and wellness amenities, which will be branded as a Miraval Life in Balance Spa upon its completion early in the second quarter of 2023.
At Kimpton Canary Hotel Santa Barbara, we finalized planning of the guestroom renovation, which is expected to begin in the fourth quarter of 2022 and be completed in the first quarter of 2023. The comprehensive renovation of Grand Bohemian Hotel Orlando was well underway, with renovation of all public spaces scheduled for completion in the fourth quarter of 2022 and the commencement of guestroom renovations in the second quarter of 2023.
During the quarter, we substantially completed the renovation of bathrooms at Marriott Woodlands in Houston, including the conversion of bathtubs to walk-in showers in approximately 75% of the guestrooms as well as the renovation of meeting space at Paramount Pittsburgh and meeting space at Royal Palms Resort.
In the fourth quarter, we’ll be renovating and reconfiguring suites of The Ritz-Carlton Denver, which will result in 3 additional keys to the hotel. During the quarter, we also worked on a number of projects to enhance the resilience of many of our assets, including the replacement of the deck outside the meeting space and above the restaurant as well as spa and repairs at Hyatt Centric Key West, completed a roofing and sealant projects at Loews New Orleans related to Hurricane Ida; restoration of the pool decks at Westin Oaks in Galleria; new exterior coating, sealants and signage at Marriott SFO; replacement of the roof at Renaissance Atlanta Waverly; and we continue to work on a number of energy efficiency projects, including 6 chiller replacements that we look to complete in 2022.
Finally, we continue our planning work on a comprehensive renovation of Kimpton Hotel Monaco, Salt Lake City, including the lobby, meeting rooms, restaurant and bar as well as the guestrooms, which will include converting tubs to showers in 35% of the inventory. This renovation is expected to commence in the second quarter of 2023.
With that, I will turn the call over to Atish.
Atish Shah
Thank you, Barry. I will cover 2 topics this afternoon. First, I will discuss our full year guidance. And second, I will review our balance sheet strength.
As for the first topic, our full year guidance. Our full year guidance is based upon current business conditions and does not anticipate changes to the economic environment or any additional COVID-related impacts. Our same-property demand outlook is unchanged. As such, our same-property RevPAR guidance is unchanged from prior guidance at down 5% versus 2019 at the midpoint.
As to adjusted EBITDAre, we currently expect to earn between $250 million and $258 million. Relative to prior guidance, our current outlook is $2 million lower on the bottom end, and $22 million lower on the top end. The current midpoint of $254 million is $12 million lower than prior guidance.
The $12 million variance is primarily driven by 3 items, as follows: number one, same-property hotel EBITDA margins; number two, W Nashville; and number three, a combination of 2 factors, the sale of the Celebration Hotel and the impact of Hurricane Ian.
I’ll now get into more detail on each of these 3 items. First, on same-property hotel EBITDA margins. A few months ago, we had anticipated stronger margin growth in the back half. With second quarter margins up 365 basis points versus second quarter of 2019, our expectation was for strong levels of margin growth in the second half. Relative to prior guidance, the change for same-property hotel EBITDA margins represents $7 million of the variance. The $7 million is driven by the items that Barry just discussed, in particular, higher hotel labor expenses as well as higher nonlabor expenses such as utility costs. We are seeing this impact more acutely in some of our larger hotels, which are still in early recovery from the pandemic.
The second item is lower earnings expectations for W Nashville, which is outside of our same-property set. We had previously expected to earn $15 million in hotel EBITDA during 2022. We now expect to earn $12 million in hotel EBITDA this year. So that is about $3 million of variance.
The third item, which results in about $2 million of variance in total, is a combination of 2 factors: first, the sale of the Celebration Hotel last month; and second, the impact from Hurricane Ian. Hurricane Ian had a slight impact to revenues, including non-rooms revenues at 7 properties in our portfolio. It also resulted in higher repair and maintenance costs due to minor damage at the 7 properties affected by the storm.
Next, I want to discuss the EBITDA guidance change by quarter. The variance is weighted more to the third quarter than the fourth quarter. In other words, of the $12 million variance to our expectations, about $8 million came in the third quarter; the remainder, about $4 million, is a reduction in our fourth quarter expectations relative to a quarter ago.
The other items that we provided full year guidance on in this morning’s release have not changed much since last quarter. Interest expense and cash G&A expense are unchanged. Our capital expenditure guidance is down $5 million and now stands at approximately $85 million.
Turning ahead to our group revenue pace. Our pace for the balance of this year has dramatically improved. At the end of the second quarter, pace for the fourth quarter was down over 20% versus the same time in 2019. We had strong group production during the third quarter with lots of bookings made for near end dates.
As of month-end September, our fourth quarter 2022 pace was about flat to pace at the same time in 2019. Group revenue pace for 2023 continues to improve as well. We, again, had significant booking activity during the third quarter, evidenced by our pace for 2023 increasing materially. At the end of the second quarter, 2023 pace was down 30%, and by the end of the third quarter, it was down 19%. Based on short-term booking trends, we expect that variance to continue to lessen.
Group rates for 2023 are currently up almost 10% versus group rates at the same time last year. Our confidence in the long term is reflected by our recent actions on both our dividend and share buybacks. We have recommenced both paying a quarterly dividend and repurchasing shares. Recall that we were restricted from either activity until this past August.
As to dividends, our Board of Directors declared a third quarter dividend of $0.10 per share. That level of dividend reflects an annualized yield above 2% on a full year basis.
As to share repurchases, we repurchased nearly $2 million of stock in the third quarter and another $6 million in the fourth quarter to date. Our recent average repurchase price was approximately $15.25 per share. We had over $86 million remaining on our Board’s share repurchase authorization. We expect to continue to utilize this tool to drive shareholder returns, and we continue to believe our stock price reflects a significant discount to value.
Moving ahead to my second topic, our balance sheet. It continues to be strong in the following 4 ways: number one, our overall leverage is manageable. Our trailing 12-month leverage ratio ending September 30 was approximately 5x. Our leverage target is to be sub 5x net debt to EBITDA. We were running the company in the low 3x to low 4x net debt-to-EBITDA range pre-COVID. We are on a path to get back into that low 3x to low 4x range. In the meantime, we have significant cushion relative to our existing leverage covenant.
Number two, we have a strong cash position. Cash at the end of the third quarter, pro forma for the sale of Celebration in October, was about $285 million. This equates to about $2.50 per share or over 15% of our current stock price, and that does not include proceeds from the pending sale of Monaco Denver. We expect to deploy this cash over time into value-creating investments, including internal and external opportunities for our own stock.
Number three, we have no debt maturities until the second half of 2024. At that time, less than 20% of our total debt matures. We have good relationships with our lenders and ample time to manage or extend those maturities.
And finally, number four, most of our debt is fixed. Currently, about 80% of our debt is fixed rate. On an annual basis, our current sensitivity to higher interest rates is about $2.75 million for every 100 basis point increase in SOFR.
In terms of FFO, 100 basis point increase in SOFR equates to roughly $0.02 of FFO. We will be looking to refinance or fix more of our debt over the next 12 months.
To wrap up, the company continues to be well positioned for an extended lodging recovery. With ample liquidity and dry powder as well as a strong base of assets still poised for recovery, we are looking forward to the next several years of growth and demand.
That concludes our prepared remarks today. And with that, we will turn it back over to Tia to begin our Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question comes from the line of Bryan Maher with B. Riley.
Bryan Maher
Thank you for those comments. Marcel, maybe you, or Barry, you could give us a little bit more color on kind of the extent of the weakness in August. Maybe what the causes were as you saw at maybe the segments? Was it more leisure, more business, more groups? Just a little more color there would be helpful.
Marcel Verbaas
Yes. I think pretty simply, leisure demand held up quite well for us in August. I think when you’re looking at the comparison of 2019, and I think we kind of all saw this that it was a little bit of a — that will — you would hope the business travel would be a little bit more robust in August, that people really seem to stay off the road in terms of hardcore business travel, not only until after Labor Day, but as we saw actually further into the second week after Labor Day, when we really saw that corporate “demand” really kind of kicked into gear one, which really accounts for, at least in our view, most of the difference between the growth in September over 2019 and the decline in August over 2019.
Bryan Maher
And then on the rate increases, we hear a lot in the media about people complaining about room rates and airfare rates. Are you seeing any pushback there? Or are people just complaining about it, but still paying?
Marcel Verbaas
We’ve seen — the operators report to us that there is very little pushback on rates when — at the time of booking. Clearly, guests are not necessarily happy when they do that. But quite frankly, into our view, the increases we’ve achieved in the hotel segment are far more reasonable than what we’ve seen in the airline segment, for example, in a number of cases.
And I think what’s been important and a big part of our strategy we’ve talked about for, I think, almost a year now, is that we have tried in our hotels to make sure that we’re providing the services and amenities that are supportive of a higher rate structure. And we think that’s one of the things that, within our various markets, has differentiated our hotels and let them perform well.
Bryan Maher
Okay. And then just last for me. When you think about everything we’re reading in the press now versus 1 quarter ago, 2 quarters ago, impending recession, et cetera, when you look back at booking trends 3, 6, 9 months ago and you sit here today and you look out over the next kind of 3, 6 months, has there been any material change in kind of the velocity of bookings? Can you give us any color there? Is the consumer moving at all as far as you’re seeing in the next quarter or 2?
Marcel Verbaas
Well, clearly, on the transient side, the booking window is still very, very short. So typically, in anything from transient basis, it doesn’t do a whole lot either now or 3 or 6 months ago.
What we’re seeing on the ground is pretty robust travel, midweek particularly. And what we’ve seen in the trends in kind of our daily occupancies is that we’re getting back to a much more traditional kind of weekly change where the midweek days are really outperforming some of our weekend days now, which is kind of as expected as we got into the fall.
Now where we obviously do have more visibility is on the group side. And Atish went into a fair amount of detail on kind of what’s happening where our group is. And we’ve seen a lot of very robust booking activity here over the last quarter or so, narrowing the gap very significantly or actually eliminating the gap here for the fourth quarter as compared to ’19, but also really seeing some really good bookings going into ’23, also at pretty robust rates still going back to various point as far as not receiving a ton of pushback on rate increases, either on the group side or on the transient side.
And we’re hearing pretty good things from our operators still as it relates to negotiated rates for next year, where we’re thinking — where we’re also seeing the same type of results as far as rate growth. So we’re not really seeing anything as it relates to that side of the business, and we’re actually pretty encouraged with what we’re seeing over the last few weeks as it relates to corporate travel.
Operator
The next question is from the line of Michael Bellisario with Baird.
Michael Bellisario
Marcel, just first question for you, just sort of in reaction to the stock price being down, I suppose. Did you contemplate or maybe why was there no pre-release or intra-quarter update to better align analyst and investor expectations as the quarter end progressed?
Marcel Verbaas
No clearly, where you’re seeing some of the softness and what we reported and what we really focused on today is a lot of what we saw really kind of towards the latter part of the quarter as it relates to the expense side of the business. And that’s obviously a little harder to see in really short term than what you’re seeing on the top line. So the top line for the quarter remained very much intact throughout the quarter with our expectations.
We were also a little bit more surprised on the expense side of the business. And I think both Barry and Atish obviously went into a fair amount of detail there as far as what the challenges were on the bottom line side. So it was just something that, obviously, to us, also is a little bit more recent information, and that takes a little bit longer to work through and figuring out what’s going on with the top line.
Michael Bellisario
Okay. Fair enough. And then one for Barry, just on the expense side. Were there any brand or market or regional differences in the margin pressures that you saw materialize in the third quarter?
Barry Bloom
Yes, for sure. Certainly, in the properties that have not recovered, they take a much bigger burden when we’re bringing on — when the operators are bringing on fixed staffing in areas like sales and marketing and repairs and maintenance, which I alluded to, but more specifically, the largest margin pressure came from our largest hotels, which — our largest non-resort hotels, which on a relative basis, are still significantly underperforming on the top line. But the operators and we agreed a while ago that we need to really make sure that we’ve got, in particular, sales teams in place to not just be catching leads but to be doing outbound selling on leads. And again, we think that part of the proof of them being successful in that is what’s shown up in closing the gap on booking pace for Q4 and for 2023.
Operator
The next question is from the line of Dori Kesten with Wells Fargo.
Dori Kesten
With respect to acquisitions, how has your underwriting changed versus a few quarters ago? Just taking into account the higher cost of debt and potential recessionary headwinds.
Marcel Verbaas
Yes. Frankly, the pipeline isn’t particularly broad at this point. We’re looking — we’re obviously always keeping an eye on what’s out there and what would make sense. We think that it’s appropriate to be probably a little bit more patient as things progress here and as we get a little bit more visibility into what happens, both on the overall economic climate but also what might happen with asset pricing. And particularly with the way the financing markets have been for hotels, we think that there might be some more interesting opportunities that would come down our path a little bit later on.
So we’re being pretty patient in that regard. And obviously, we have to take into consideration where interest rates are, what is happening on inflation, both on top line and on the bottom line. So we are looking at things. We’re keeping an eye on things, but aren’t — don’t have an overly filled pipeline at this point.
Dori Kesten
And when you look out over the next few years, would you expect to have a higher weighting towards group? I’m just thinking about the 90% to 95% of FTEs back, but you’re still 1,200 basis points below on occupancy. So is this just more about building back your business a little — or sorry, building labor ahead of business returning?
Marcel Verbaas
Well, I think certainly, when you look at the overall portfolio, that’s what happened. And to differentiate a little bit, we — I mean it’s interesting, the properties kind of fall into 2 clusters. The properties that are more or less fully recovered in occupancy are at the 95% FTE level. The properties that have not fully recovered are closer to the 90%, a little bit sub-90% in terms of FTEs compared to 2019. So that’s a little bit independent of — to our mind, it’s a little bit independent of group and more directly related to occupancy, because the primary piece that’s still left or could be left is the variable labor that relates to rooms expense and rooms cleaning.
In terms of kind of fixed staffing around the property and getting things done, whether that’s in AMG or sales and marketing or for repairs and maintenance, that the properties have kind of reached relatively stabilized levels, and there are not a lot of open positions in those areas at this point.
Operator
The next question is from the line of Aryeh Klein with BMO.
Aryeh Klein
In October, with business demand recovering, RevPAR was flat versus 2019 versus plus 3% in September. Why wouldn’t there be normal — above normal seasonal growth in October? Is leisure dragging in any way relative to normal seasonality? Or is there something else going on?
Marcel Verbaas
No, it’s a great question, Aryeh. We actually — you obviously heard us talk quite a bit about how encouraged we are about what we saw in the trends in October. And a lot of that has to do with the fact that our midweek occupancies in October were pretty significantly above what we’ve seen in prior months. So we really are seeing that comeback of business travel happening, and we’re certainly seeing strengthening on the group side.
The October situation is a little bit unique, and we haven’t talked about this much in the last year or 2 because we were just doing comparisons to very low baselines. But what we are getting back into now is calendar changes. And what you saw in October is October of this year had 5 weekends in it versus 4 weekends in 2019. And a fifth weekend adds another Sunday, which is pretty low in occupancy.
So if you kind of strip that out, we actually saw some positive movements in October, where this last weekend of the extra Sunday leading into a Monday night of Halloween, those 2 nights were particularly soft. So those brought down the average. But otherwise, we actually would have seen some pretty good growth for the month.
Aryeh Klein
Okay. Got it. And then as you think about the margin profile of the business and where it was in 2019 and costs now coming back, have your views changed on the potential long-term improvements that can be realized?
Marcel Verbaas
Well, we’ve spoken quite a bit about this and answered questions in the past couple of years. And I think we, as opposed to other people in the space, have always been pretty cautious as far as talking about any kind of specific margin improvement that we thought was going to come out of this. Because we’ve always been very cognizant about the fact that we don’t think we have a better way of running hotels and more efficiently running hotels, but there is no getting away from the fact that there is a good amount of cost pressure on the labor side and overall expenses in operating hotels.
So we are pleased, frankly, that we still were able to eke out 48 basis point improvement in margins over the third quarter of ’19, in an environment where, obviously, we’re seeing a lot of pressure on expenses. So we are absolutely still running them a little bit more efficiently. But clearly, there is — everyone is seeing it everywhere. Inflation is everywhere. There is cost pressures everywhere. And it is something that we always felt it was a little bit premature to talk about we’re going to be able to achieve x basis points of margin improvement over time.
Operator
The next question is from the line of David Katz with Jefferies.
David Katz
We’ve covered a lot of the issues I wanted to raise, but I did want to go back to just kind of the maturity flow taking a little longer term, right? There’s a couple of mortgages, and then there’s the bank facility that I think is a ’24 thing. So we should start to see and hear some stuff about it next year. Is that about right? And how are you thinking about your strategies here?
Atish Shah
Yes. Thanks, David. Absolutely. So we do have the line of credit, which matures in the first quarter of 2024. It’s undrawn. And then we’ve got $275 million of worth of debt that matures in the second half of 2024. And so you should start to see us sort of address those next year.
I’ll say that — a few things about how we go about those maturities, which I mentioned in my prepared remarks that, that debt that matures reflects about 20% of our total debt. So relatively manageable. All that debt is bank debt, and we continue to have good relations with our bank syndicate. We did 4 amendments during COVID. The banks were really supportive and cooperative. And so those are — that’s our expectation right now.
Of that $275 million, some is mortgage debt, a couple of properties. They have performed well. It’s not a lot of debt relative to the value of those properties and how those properties are yielding. And then the remainder is 1 term loan and an undrawn line. And how I would think about those pieces that’s, in total, $575 million worth of capacity. But again, the line is undrawn. So it’s only $125 million that’s on that term loan. But say, even the $575 million relative to our unencumbered assets is a very manageable level, 29 of our 33 hotels are unencumbered. So that’s roughly $3 billion of asset value, and that’s how the bank syndicate will look at our level of bank debt relative to the pool of assets. So that’s a little bit of how they think about it, why our view is that it is quite manageable.
The only other thing I’ll say is the commentary that we’ve gone from our banks since we’re always in dialogue with them is that we did everything that we said we would during COVID. We issued high-yield debt and paid off some bank debt. And so we’re viewed as a credible, good credit and kind of manageable level of bank debt relative to the size company and the unencumbered asset base. So that’s kind of the full story and how we’re thinking about the maturities in 2024 and the overall philosophy on the balance sheet.
Operator
The next question comes from the line of Tyler Batory with Oppenheimer.
Jonathan Jenkins
This is Jonathan on for Tyler. First one for me, following up on the discussion of the business moving to a more normalized mix. Can you provide some additional color on the business mix now and how that compares to pre-pandemic and the potential upside that are made there as we move further along in the normalization process?
Barry Bloom
Yes, sure. I think if you piece together everything we’ve talked about, it’s — we still think that — we know that relative to 2019, we’re generating more leisure rooms to our portfolio than we had before. Thinking about Q3, group business has certainly recovered on a revenue basis, a little less so on a room night basis. So there’s still some opportunity to grow into that.
The biggest piece that’s still missing from the business is that — is on the corporate transient side. And as we’ve continued to see the smaller businesses, the local retail businesses are traveling as much more than they had during COVID. The biggest gaps are still from the largest customers, whether that’s big 4 accounting firms, large consulting firms, some of the Fortune 500 companies, their business is still down pretty significantly.
But certainly, as reported by the properties and as we can see in the weekly data, particularly as we’ve talked about a couple of times today, that Tuesday and Wednesday night occupancy, that those travelers are continuing to come back more and more each week, we’ve seen, again, kind of since mid-September, and feel like, ultimately, the question is the time line that the business should stabilize around where it was before for our business, which is relatively equal parts in each of those segments.
Jonathan Jenkins
Okay. Great. And then switching gears to the common dividend. Any additional details you can share in terms of what factors contributed to that decision? Why you think that level is appropriate? And I’m also interested in your perspective on potential payout ratios going forward. How do you think about the right payout ratio or the right level of quarterly payment today versus pre-COVID, given all the movements that have occurred in the portfolio?
Atish Shah
Yes. Sure. Thanks for the question. So in terms of dividend, the way our Board looked at this is that the business is recovering, and they view that this would be an appropriate level of dividend, given that we have sort of more visibility into the business and the demand has been strong. And our expectation is that, over time, that our payout ratio would move to kind of a 65% level, which was where it was pre-COVID. So that’s kind of the thinking right now that we return to that at some point in time. And our Board tends to revisit the level of dividend in the future. So we’ll obviously be updating you all on that as things move.
Operator
The next question comes from the line of Bill Crow with Raymond James.
William Crow
I wanted to drill down a little bit in Nashville and the kind of 20% miss on the first year underwriting. I’m just — this is really before all the new luxury supply hits. So how are you adjusting your kind of long-term underwriting assumptions on that asset?
Marcel Verbaas
Yes. Well, I mean a lot of the supply already has hit at this point, and a fair number of assets have opened actually over the last number of months. So the bulk of the supply, we’ve actually seen coming in already. When you — when we acquired the hotel, we talked about expecting about $13 million to $15 million of EBITDA for this year. As we got a couple of months into it, we were more comfortable that we thought we’d end up on the high end of that range, around the $15 million number.
Fortunately, the summer was just weaker from both kind of the occupancy side, and we do think that that’s really a matter of not really focusing on the right kind of segmentation mix, probably need a little bit more group than what we had on the books for this summer, which would have optimized the operations a little bit better.
Also some short-term issues as it related to optimizing the food and beverage facilities, we think that there’s a lot of upside to be found there going forward. So if you look back at when we initially acquired , like I said, we expected about $13 million to $15 million this year. We’re going to end up somewhere in the $12 million range. So clearly, a little bit south of where we thought and hoped it would be this year.
But with everything that’s still going on at the property, the focus that the team has, some of the changes that have been made at the operating team level as well, we think that our long-term thesis absolutely remains intact there. And we’re very positive about all the developments that continue to happen in Nashville. So what we’re seeing here really is, in our minds, kind of some growing pains, I would describe it. And we think that there is absolutely a lot of upside to come there and we’re very comfortable with that asset.
William Crow
Are you — if I can just probe a little bit more. I think we’ve talked before about the W brand and kind of its attempted rebirth, I guess. Now that the supply that you referenced, and in referenced, has opened, do you think you’re losing to other brands that have entered the market? And do you still believe in the W brand over the long term?
Barry Bloom
Yes, Bill, this is Barry. We definitely do. And when you — just maybe put a little finer point on what Marcel said. April and May were tremendous for this hotel, and October has been a tremendous month as well. What the property really experienced was — and just put it right out there, was a bit of a miss on group strategy over the summer months. Like many markets, this property needs group business midweek, and they’ve done a great job of capturing that in the months where there was both high demand and high rates, which was really a good part of the explanation of April, May and October.
Summer months were a little different. And the hotel has been operating in a rate strategy that they had worked with philosophically, which was to maintain very high rate for midweek group during the summer. And the reality is that they were mispriced, and we’re not able to pick up the right number of group rooms in the summer. A strategy that’s really hard to course correct that quickly, but we have a lot of optimism about that strategy — about the change of that strategy as we look into next year and we look in general into months that may be a little bit softer from a weekday demand perspective.
Marcel Verbaas
And I think I mentioned in my remarks as well, Bill, October RevPAR was about $320 at the hotel. So — and that comes after a number of those new additions that you’re talking about that opened up in the market. So clearly, there’s momentum there. There’s — and there’s a lot of confidence that we have around those operations.
William Crow
Yes. If I could just ask one more follow-up question. And maybe, Barry, for you. There’s talk about the level of staffing driving the labor cost higher. But where are we on a rate basis? Are we still losing employees to other businesses and the $20 or $25 an hour sort of warehouse and retail workers? Or do you think rates have stabilized at this point?
Barry Bloom
Yes, we’re seeing a lot less of the losing business — losing employees to other businesses as our operators report that to us. And I think in most markets that not only has the labor market stabilized a little bit in terms of wage rates, but also, I think people have come around to understanding that in a stable environment, the hotel business is a great business to be in. And both at the property level, at the management company level and at the HLA level, so at the national level, there’s been a lot of emphasis being put on why a hotel industry can provide a great career opportunity and that you can come in at entry level and really have a lot of opportunity.
And I think people are — have been much more receptive to that as the labor markets may have just tightened in general a little bit, and there’s not — and you can go and apply for any position that you want out there in any industry and be certain of getting that opportunity. So that’s what we’ve heard from the operators. And I think that certainly kind of rings true in terms of what we’ve seen in terms of filling open positions at what are now relatively stable wage rates.
Operator
The next question is from the line of Austin Wurschmidt with KeyBanc.
Austin Wurschmidt
So I wanted to hit a little bit more on some of the challenged markets in the Bay Area and Portland. And Barry, I believe you’ve spoken about how citywide and group demand have negatively impacted these markets. And I’m just curious how, within sort of the pace of the group calendar, how does it stack up specific for these markets as we look out into the — late into this year and into 2023?
Barry Bloom
I’ll start in Portland first, where the convention center really is still just now having the first benefit of having a true headquarters hotel that they never had in 2019. So it’s not a great comparison. Their bookings are up fairly significantly for next year, as are the hotel’s in-house bookings. And I think we’re pretty pleased with how Portland has come online after the pandemic, and that, that location and the quality of the asset have proven their merit to a great extent.
San Francisco, as I think you know, has a somewhat better year next year in terms of city-wise compared to 2019, and certainly compared to the last couple of years. But our property at the airport, to Marriott has really only benefit from that during true compression from really large events. And part of the strategy there for many years and certainly, part of the strategy going into next year has been for the hotel to really focus in on bringing in its own in-house group. It’s got some very nice meeting facilities that have often been underutilized because the hotel had the benefit of so much great transient business historically, but the hotel is really making a pivot to do that.
In Santa Clara, we’re continuing the Bay Area since those are areas you focused on. Business in the Santa Clara Convention Center is weaker next year, but we have not historically driven a lot of business out of that center, which has really been relied much more heavily on local events and things like that. So again, that property has kind of doubled down on its efforts to be out there looking for a business that can be accommodated within the hotel. And again, all of that net-net is reflected in the booking pace we talked about for ’23.
Austin Wurschmidt
Yes. Yes. No, that’s helpful. And I recognize overall, the booking trends for group are improving, and I appreciate all of the updates you provided. Is there anything — any signs of anything that would give you pause on further improvement from here for next year, either select cancellations you’ve seen or a decrease in the conversion rate of leads to bookings? Just anything that you could share.
Marcel Verbaas
Yes. No, we continue to see — obviously, see group leads become a — continue to grow. Just to tie a couple of things together that I talked about in the prepared remarks and in some of the Q&A is that we’ve made a concerted effort in our portfolio to make sure that our operators have hired enough salespeople to, quite frankly, process the amount of business that is coming in, but also to really focus on hiring additional labor that’s out there truly selling and proactively looking for business with that strategy has paid off for us, we think. As we look at how the properties performed from a group perspective in Q3 and where we are in Q4, I think that’s going to be a material part of a positive strategy for the portfolio as we work through next year.
Barry Bloom
Yes. I mean I would just add that the production that I talked about in the quarter was really remarkable. I mean in the third quarter, the quarter bookings for the second half were up 3x the level that they were in the third quarter of 2019. So we put a tremendous amount of business on the books. And group business continues to be very short term in nature.
I would also say that rate progression is a big positive. If we go back to the end of the second quarter and looked at our pace for 2023, group rates were up about 4% or 5% by the end of the third quarter. Our ’23 group rates were up close to . So again, real positive from that perspective as well. And it’s broad-based. I mean there are a lot of our big group hotels are seeing good production. It’s not a tale of only certain markets only have certain types of assets on the bigger hotels continue to move in the right direction.
Operator
The next question is from the line of Stephen Grambling with Morgan Stanley.
Stephen Grambling
I think that we’ve been hearing about outperformance from some of the hotels with refreshes or renovations during the pandemic kind of across the broader group. I guess are you seeing any outsized benefits from these ROI projects that you’ve already done? And as we think about the ROI that’s assumed on what you’re doing in the future, any thoughts on how that may be similar or different?
Marcel Verbaas
Well, clearly, the most obvious example in our portfolio is what we did at Aviara. And I touched upon it quite a bit in my prepared remarks, but for that property to deal with the effects of COVID in the middle of doing this whole project and already being in the stabilized range of where we thought this hotel would end up from an EBITDA perspective, which is very significantly above where it was operating before, is obviously highly encouraging.
And with that asset, particularly, we’re nowhere near stabilized occupancy. So we think that there’s a lot of upside there. So it is a project that we like to talk about and that we focus on quite a bit because it is an asset that absolutely was screaming for that type of ROI investment and where we identified the absolute right type of level of investment to make.
When we acquired it, I know a lot of people were looking at it thinking that it might — that the amount might be very different from what we ended up spending on it. And we think we made the absolutely right investment amount at the hotel and are getting the appropriate return for it.
So it is an example for some of the things that we may be looking at in our portfolio and particularly, when there’s a chance for us to kind of catch up to a set where we think it is — where it could more appropriately operate after making the right kind of investment, as I said.
Barry Bloom
I think the other project that I think has certainly had a post-COVID benefit that was a real ROI project was the new ballroom that opened at Hyatt Regency Grand Cypress at the end of 2019. And while it’s a little hard to measure because group business there has been good but has not fully recovered, we know that, in fact, during the toughest days of COVID, having that extra ballroom was a tremendous ability for the asset in terms of spacing out groups.
And as we look to booking this as the hotels booked this year and looks in the booking in 2023 and ’24 and beyond, having that second ballroom has really changed the game for them in terms of their ability to staff in-house groups instead of relying — instead of having to have just one in-house group.
And what we’ve seen, the property has performed tremendously well this year and continue to perform very well on the leisure and transient side — or the transient leisure side, in part because the hotel has been able to compress rates when they have 2 groups in-house using the 2 ballrooms simultaneously.
And we did a small project there with — where we renovated the restaurant in 2019, never really got off the ground, but then further reconcepted at the end of 2021 with the celebrity chef Richard Blais, which has become a significant draw to the hotel for transient and group as well. So we’ve seen real benefit and returns on that, on the work we’ve done at that hotel as well. And again, look to doing absolutely similar things in every one of the more comprehensive renovations that we talked about in the prepared remarks and in our earnings release.
Atish Shah
Yes. And just to add one more comment. I would say, we do look at the returns on ROI projects. We underwrite all of that and feel confident in the level of returns, double-digit type returns that we’re getting from these projects. And we’re also looking at, after the CapEx, what’s our overall basis in the asset as they compare to other assets in the market. So there are a few things we’re looking at. We continue to feel good about the investments we’ve made in some of the projects that Marcel and Barry just talked about.
Operator
There are no additional questions at this time. I will pass it back to Marcel Verbaas for closing remarks.
Marcel Verbaas
Thank you, Tia. Thanks, everyone, for joining us today, and we look forward to seeing many of you over the next few weeks.
Operator
That concludes today’s conference call. Thank you. You may now disconnect your lines.
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