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Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Fourth Quarter 2022 Earnings Call. . I would like to remind everyone that this conference is being recorded today, February 22, 2023, at 11:00 a.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Aaron Reyes: Thank you, operator, and good morning, everyone. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO and property level adjusted EBITDAre. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.

On today’s call, references to our comparable portfolio will mean our 13-hotel portfolio, which includes The Confidante Miami Beach, but excludes Montage Healdsburg and 4 Seasons Resort Napa Valley. Additional details on our fourth quarter performance have been provided in our earnings release and supplemental, which are available on our website. With us on the call today are Bryan Giglia, Chief Executive Officer; and Robert Springer, President and Chief Investment Officer. Bryan will start us off with some highlights from last year, followed by some commentary on our fourth quarter operations and recent trends. Afterwards, Robert will discuss our transaction activity and other recent capital investments. And finally, I will provide a summary of our current liquidity position, recap our fourth quarter and full year ’22 earnings results and provide some additional details on our outlook for 2023.

After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Bryan. Please go ahead.

Bryan Giglia: Thank you, Aaron, and good morning, everyone. Before we get into the quarterly highlights, I want to take a minute to recap 2022, which began with some uncertainty and transition and ended with solid execution and a firm strategy in place. Last year, we reinvigorated our strategy, focusing on 3 simple tenants to create and realize shareholder value: recycling capital, investing in our portfolio and returning capital to our shareholders. On the recycling front, we began the year by divesting of 3 hotels in Chicago. While we expected the hotels and the Chicago market to recover in 2022 and 2023, our view on these investments was that given the significant future capital needs and near- and long-term cost pressures, our return on invested capital will continue to decline and it was time to redeploy those proceeds into better growth opportunities.

We were fortunate to do just that with the acquisition of The Confidante Miami Beach and a 25% interest in the Hilton San Diego Bayfront, giving the company 100% ownership of this fantastic hotel. Overall, we sold $197 million of Chicago real estate and redeployed those proceeds combined with nearly $200 million of our balance sheet capacity to acquire Miami Beach and San Diego. We think this was a good trade. Miami performed well for us in 2022, and we are preparing to transform the resort into the Andaz Miami Beach starting in the second quarter of this year. Hilton San Diego remains a standout in the portfolio as the hotel continues to benefit from sustained leisure demand and a strong resurgence in in-house corporate group business. The acquisition of our partner’s 25% share implies an 8% cap rate on 2022 hotel NOI.

And with additional earnings growth forecasted for 2023, we are pleased to have consolidated ownership of this well-performing asset. In addition to an active year of capital recycling, we also identified and executed on several investments in our existing portfolio that are expected to result in additional value creation. In 2022, we completed the renovation of all standard guestrooms and bathrooms at the Hyatt Regency San Francisco. We were able to renovate without incurring meaningful displacement, and now our hotel is better positioned as group business and transient demand gradually returned to the market. At the Hilton San Diego, we completed a full restaurant renovation, including an expanded market concept that will streamline operations, increase dining options, enhanced overall guest satisfaction and increase profitability.

We also continued the repositioning of the Renaissance D.C. to the Westin brand. All meeting space is complete, guestrooms are being turned over and the final phase, the lobby and food and beverage offerings, are underway and will be completed in the second half of this year. Our renovation headwind is subsiding, and we expect to see earnings acceleration later this year as we benefit from a fully renovated flagship Westin. Finally, we made significant progress planning for the transformation of The Confidante Miami Beach to the Andaz Miami Beach. We look forward to sharing with you the future look and, more importantly, the value we expect to create at this beach front resort in the future. The last element of our strategy is the return of capital to our shareholders.

In 2022, we reinstated our quarterly dividend and also returned $108 million to shareholders by repurchasing our shares at a meaningful discount to NAV. While our share repurchase activity will remain opportunistic, our common dividend will continue to provide a more consistent return of capital. That said, in 2023, we have repurchased $11 million of our common stock, further demonstrating our willingness and ability to repurchase stock at appropriate times. Now shifting to quarterly operations. We are pleased with our performance in the fourth quarter with results that exceeded our expectations and that added to an already productive year for Sunstone. During the quarter, our portfolio continued to command strong rates with comparable average daily rate of $286, a 12% increase from last year and a 16% increase as compared to 2019.

While we saw meaningful year-over-year rate growth across our portfolio, our urban hotels continue to see the biggest gains and grew rates 20% in the quarter as compared to the prior year. San Francisco led the portfolio for a second quarter in a row, and we expect that our well-located recently renovated hotel will contribute further to our growth in 2023. Comparable portfolio occupancy was 68% and includes the impact of the renovation currently underway at our soon-to-be rebranded Westin Washington, D.C. As I noted earlier, this project will be completed later this year and will provide an additional layer of growth for us going forward. Including our 2 wine country hotels, our total portfolio generated a fourth quarter RevPAR of $207 made up of occupancy of 67% at a $309 average daily rate.

Non-room revenues came in strong during the fourth quarter, benefiting from continued increases in banquet spend. We once again saw a significant contribution from food and beverage revenue, which was near 2019 levels. Banquet and AV sales per group room was $238 for the comparable portfolio in Q4 compared to $209 in 2019, up 14%. The strength in group activity has been encouraging with several of our larger hotels exceeding pre-pandemic levels. Hilton San Diego Bayfront banquet contribution per group room night was up 48% over Q4 2019. Hyatt Regency San Francisco, which has been slower to recover than many of our hotels, saw catering contributions up 14% to 2019, driven by menu pricing initiatives, upselling on site and groups exceeding their minimum food and beverage thresholds.

Including the out-of-room spend, our portfolio generated an additional $122 of revenue per available room in the quarter for a total RevPAR of approximately $329. For the comparable portfolio, total RevPAR came in at $305 within 3% of 2019 with occupancy 15 points lower than 2019. For the full year, total RevPAR came in at $326 for the total portfolio. During the quarter, we also collected $10 million of business interruption insurance proceeds associated with lost revenue related to the pandemic. While we are continuing to pursue additional recovery under the policy, which has a $25 million limit, no additional amounts are guaranteed. On the expense side, we continue to navigate the increases in costs we’ve seen over the last several years and look for creative ways to reduce expense pressures.

We have worked with our operators to optimize menu offerings and review pricing to mitigate rising food and beverage costs. While hourly wage growth continues to hover at the high end of historic annual growth ranges, our managers have been able to drive efficiencies in certain areas to help offset higher labor costs. The fourth quarter continued to see elevated utility costs, which makes our recent energy efficiency investments that much more valuable. In Wailea, the first phase of our solar panel installation has generated significant savings, and we are looking forward to completing the second phase later this year, which will increase our solar production to nearly 20% of the resort’s total energy use. Despite cost pressures, our comparable hotel portfolio generated an EBITDA margin of 28.5% in the fourth quarter, which does not include any benefit from the business interruption proceeds.

Excluding our hotel in D.C., which is under renovation, EBITDA margin was nearly 30%, which is only 140 basis points below that achieved for the same quarter in 2019, even with nearly 13 points of lower occupancy. As we move into 2023, our focus is on maximizing portfolio EBITDA as we aim to bring each hotel to its optimal occupancy level. Now turning to segmentation. Our comparable portfolio generated 174,000 total group room nights in the quarter, and the group segment comprised roughly 37% of total demand. Q4 group room night volume represents approximately 92% of historical amounts with average rates 8% higher than in the same quarter in 2019. While the total comparable revenue is still trailing to 2019, Corporate and Association segments continue to comprise the majority of Q4 group mix, which is a positive trend as these rates are typically higher for those groups.

Comparable group production for all current and future periods in Q4 was 230,000 room nights, more than what we put on the books in Q4 2021 and at 15% higher rates and a 5% increase in revenue production relative to Q4 2019. For the full year, group production was at 82% of 2019 room nights, but at a 22% higher rate. Hilton Bayfront’s production was strong in Q4, largely due to groups in nonholiday periods, which created compression and drove market share. Our ability to layer more group and social events is a direct result of our recent addition of 6,000 square feet of stunning waterfront event space that opens up into an event lawn that provides a signature and a highly desirable Southern California indoor/outdoor experience. Boston Park Plaza strategically placed in-house group business over citywide overflow, yielding substantial food and beverage contribution.

Again, our late 2021 investment to add 5,000 square feet of flexible modern meeting space allowed the hotel to increase its group capacity. In terms of transient business, which accounted for roughly 60% of our total room nights in the quarter, comparable rates came in at $311 or 22% higher than the pre-pandemic levels we saw in the same quarter of 2019. At the JW Marriott New Orleans, consulting and government accounts continue to drive special corporate volume for the Hyatt Regency San Francisco, business transient accounts performed well in 2022 with significant participation from technology, finance and consulting accounts, leading to corporate negotiated nights at approximately 96% of 2019 levels for the full year. Marriott Boston Long Wharf also continued to see an uptick in business travel from professional services and increases in government defense contractor bookings.

As we move into the early part of 2023, we are pleased by the trends we are seeing in transient bookings. For the last few weeks, our transient pickup for the next 6 months has been hovering just below 2019 levels. A meaningful improvement relative to the mid-teens variance we saw in the latter part of 2022. The increased velocity in transient bookings is most prominent at our urban hotels as higher contributions from traditional corporate and government accounts point to more robust business transient demand in the year ahead. Based on our 2022 performance and what we are seeing so far this year, we remain encouraged about the outlook for 2023. Lead volumes at the end of 2022 surpass 2019 levels, and we continue to see strength in short-term booking activity with higher contribution from corporate group events.

Our group pickup in the quarter for the quarter was higher than historical averages, underscoring the trend we have seen of groups booking closer in to their events. Pace for the first half of 2023 is down only 2% to 2019 for the comparable portfolio with lower room nights offset by higher rates. Excluding our hotels undergoing significant renovation, our first half pace flips positive to up 2% compared to pre-pandemic volume. While we still have some work to do in the second half of the year, the shorter-term nature of booking patterns should help fill in the third and the fourth quarters with additional group business as the year progresses. So far, we have seen strong group booking activity at our hotels in Boston and Washington, D.C. in the first quarter, and both San Diego and San Francisco have strong citywide calendars for Q1 compared to last year.

We expect our hotels in these markets to see some benefit from market compression, which should translate into pricing strength. Group booking pace for our first quarter at our Hilton Bayfront and Renaissance Orlando is ahead of the same time in 2019. Our 2 resort assets in Wine Country are also seeing positive group trends and the quality of the group’s booking at these properties is extremely high, generating attractive group rates with meaningful ancillary spend. As of the start of the year, Montage has nearly twice the amount of group revenue on the books for 2023 than it had as of the start of last year, and group pace for the four seasons is up over 80%. The significant growth in pace at each resort is a combination of more nights booked and higher rates.

Overall, we are pleased with the types of events these properties are now attracting as they continue to ramp up. As part of our earnings release this morning, we reintroduced earnings guidance. Absent a material slowdown in the broader economy, we expect significant year-over-year EBITDA growth in 2023. Given the uncertainty in the macro environment and the short-term nature of booking patterns, we are providing earnings guidance for the first quarter supplemented by full year estimates for certain corporate level expenses. Despite additional profitability growth this year, our 2023 results will not reflect the full earnings potential of the portfolio as the completion of renovations that are or will soon be underway this year and the contribution from our recently developed and still ramping assets should equate to meaningful additional profitability growth beyond the current year.

This is an important distinction, given the disparity and recovery across our various markets and the nuances specific to our portfolio, I believe Sunstone will benefit from multiple layers of growth in the coming years. Later, Aaron will provide the specifics of our near-term outlook. Our balanced approach to capital allocation in 2022 will benefit our portfolio and our shareholders in 2023 and beyond. First, our wine country resorts continue to ramp, while these luxury resorts saw some leisure softness in the second half of 2022, we focus each resort on better balancing their customer mix, increasing the amount of group business in order to benefit from a strong average daily rate and meaningful out-of-room spend. Both resorts are now positioned well for 2023 with a sizable group base that will enable them to drive profitability.

There is more work to do, but each resort should see significant earnings growth this year. Second, the acquisition of our partner’s 25% ownership of the Hilton San Diego Bayfront continues to be one of our strongest performing assets with considerable in-house group on the books for 2023. San Diego exceeded 2019 earnings in 2022, and we expect additional meaningful growth in 2023. Third, our investments across our portfolio will continue to provide long-term growth. The investment we made in San Francisco last year is increasing our ability to add group business in 2023. The transformation of the Renaissance D.C. to the Westin D.C. will be completed during the second half of this year, turning the displacement headwind into a tailwind. Despite renovation headwinds at the hotel during the first half of 2023, we still expect earnings growth over 2022 that will accelerate into 2024.

In 2023, we will begin and complete the rebranding for the Renaissance Long Beach to the Marriott Long Beach. Last is the rebranding of the Andaz Miami Beach, which will begin construction during the second quarter. And while we will experience displacement this year, it will add additional growth in 2024 and 2025. We remain thoughtful on our capital allocation and believe that we have layered our investment to provide multiyear growth and more importantly, value creation. To sum things up, better-than-expected performance in the fourth quarter gives us confidence as we move into 2023. Our well-located urban and group-oriented assets will see continued growth in the coming years as demand for business travel and corporate events continues to catch up with the already robust leisure demand at our resort properties.

Given the Omicron headwinds earlier last year, we are well positioned for a strong year-over-year growth in the first quarter and see opportunities for ongoing growth across our portfolio in the remaining quarters of 2023. Additionally, Sunstone continues to actively allocate capital, investing in our portfolio recycling sales proceeds into new growth opportunities and returning capital to our shareholders through share repurchase and dividends. We believe this is a winning formula that will provide long-term value to our owners. And with that, I’ll turn it over to Robert to give some additional thoughts on our transactions over the last year and upcoming capital investments. Robert, go ahead.

Robert Springer: Thanks, Brian. We are pleased with the transaction activity we completed in 2022. Early in the year, we exited the Chicago market, which we believe did not offer sufficient long-term growth potential and recycle those proceeds into higher growth opportunities. Midyear, we purchased The Confidante Miami Beach, which has been exceeding our underwriting and which will soon be transforming into the Andaz Miami Beach. As we shared previously, the renovation and repositioning of this hotel will begin this year and conclude next year. We remain enthusiastic about this project and the significant earnings potential of this well-located beachfront property. We are completing the design and approval phase working with some exciting potential food and beverage partners and preparing for construction to start during the second quarter.

The end product will be a luxury beachfront resort at a highly attractive all-in basis. We also bought out our JV partner at the Hilton San Diego Bayfront for an implied value of $628 million or an attractive sub 12x multiple on 2022 EBITDA. This was a great opportunity for us to consolidate ownership of a market-leading, well-located asset in a premier convention and resort destination. Overall, we believe our investment activity in 2022 represents thoughtful dispositions and capital recycling into higher growth and better per share NAV enhancing opportunities. In addition to transactions, we were actively investing back into our portfolio in 2022. We look forward to debuting a new high-end pool at Wailea Beach Resort later this spring. The addition of the Olakino pool will provide guests with a new health and lifestyle focused experience.

This investment will not only generate incremental revenue from the guests who would like to purchase access, but it will also improve the overall resort experience and further enhance the appeal and value of the asset. Additionally, the second phase of our solar installation will be completed later this year and help make the resort more sustainable while lowering utility costs. Work is also progressing on the conversion of the Renaissance Washington, D.C. to the Westin brand. The project is expected to be completed by the third quarter and will contribute to year-over-year growth in the second half of 2023. We expect to relaunch the hotel as the Westin in Q4 of 2023. We are also converting our Renaissance in Long Beach to a Marriott, and that project will be kicking off later this year.

We expect the investments to better enable the hotel to compete for business and grow earnings. The hotel was approaching a cyclical renovation and does not require a meaningful incremental investment to secure the Marriott flag, which should drive higher group rate and transient occupancy. The renovation will begin in the second quarter of this year and be completed by the end of the year, and we do not anticipate significant disruption while the work is performed. 2023 will be an important year for us as we will begin to realize the benefits of our recent investments and conversion activity and start to lay the groundwork for the next layer of growth in the portfolio. Recycling capital will continue to be a major component of our strategy as we look to harvest gains and redeploy proceeds into new growth opportunities.

The transaction markets remain challenging given economic uncertainty and restrictive financing markets. That said, we maintain considerable balance sheet capacity, which will allow us to be opportunistic and take advantage of dislocation. Additionally, we constantly look for ways to creatively grow and enhance the value of our portfolio, and we look forward to sharing updates on our investment activity as the year progresses. With that, I’ll turn it over to Aaron.

Aaron Reyes: Thanks, Robert. As of the end of the fourth quarter, we had approximately $157 million of total cash and cash equivalents, including $56 million of restricted cash. We retained full capacity on our credit facility, which, together with cash on hand, equates to nearly $660 million of total liquidity. We have one debt maturity in December of this year and expect to address the refinancing in the next few months. As of the end of the fourth quarter, our net debt and preferred equity to EBITDA stood at only 4.1x. And our net debt to EBITDA was less than 3x, giving us one of the strongest balance sheets in the sector. Shifting to our financial results, the full details of which are provided in our earnings release in our supplemental.

The quarterly results, which surpassed our initial expectations reflect continued strength in leisure travel and growing corporate and group demand. Adjusted EBITDAre for the fourth quarter was $69 million and adjusted FFO was $0.26 per diluted share. The fourth quarter results include approximately $9.7 million of proceeds net of expenses received from a COVID-related business interruption insurance claim. For better comparability, we have removed this net revenue from the hotel level financial data and margin calculation presented in our press release and supplemental reporting package. As Brian mentioned earlier, while forward visibility remains challenging, we are providing earnings guidance for the first quarter. Based on what we see today, we expect first quarter total portfolio RevPAR to increase between 30% and 32% as compared to the first quarter of 2022.

While the impact of the Omicron variant makes for an easier comparison in Q1 and will concentrate full year RevPAR growth in the first part of the year. Assuming a steady economic environment, we believe our portfolio can deliver meaningful year-over-year RevPAR growth in each quarter of the year, which could result in full year total portfolio RevPAR growth ranging from the low double digits to the mid-teens, excluding our hotel in Miami, that will be undergoing renovation. For the first quarter, our adjusted EBITDAre guidance ranges from $51 million to $55 million, and our adjusted FFO per diluted share ranges from $0.16 to $0.18. We expect to invest between $130 million and $150 million into our portfolio this year and will incur some displacement in connection with our larger projects.

Our first quarter outlook includes approximately $3 million of EBITDA displacement related to the in-process conversion work at our hotel in D.C. For the full year, we estimate that we will incur between $16 million to $18 million of EBITDA displacement related to the completion of the Westin D.C. conversion and the renovation work at The Confidante Miami Beach as we begin the conversion work at that hotel. Note that our guidance does not assume the collection of any additional business interruption insurance proceeds or incremental stock repurchases. Now turning to dividends. Our Board has declared a common dividend of $0.05 per share for the first quarter, along with the routine distributions for our Series H and I preferred securities. And with that, we can now open the call to questions so that we are able to speak with as many participants as possible.

We ask that you please limit yourself to one question. Operator, please go ahead.

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Operator: . Our first question comes from Smedes Rose from Citi.

Smedes Rose: I just wanted to ask you a little more when you said that you think RevPAR growth this year could be the low double digits to the mid-teens. Do you think that’s more driven by occupancy versus rate? And maybe you could just speak to how you’re thinking about overall cost growth this year and kind of the property level margin?

Bryan Giglia: So when you look at the cadence of the distribution from quarter-to-quarter, there’s — for the RevPAR — or looking at the RevPAR buildup, you’re going to see a majority coming in, in the first half of the year with the year-over-year comp to the Omicron last year. So occupancy, especially at our group and urban hotels will pick up meaningfully in Q1 also in Q2. And then as we look through the rest of the year, while we do anticipate rate growth, and we anticipate more rate growth coming from those urban and group hotels than the leisure hotels that the composition will be more — definitely more skewed to occupancy. Now when we look at what does that mean for hotel EBITDA margins. When we look over last year and we look at labor costs that came in, our expectation was 4% to 5%.

They kind of came in right there. We’re probably towards the lower end of that this year. There are certain fixed costs that have been better. We’ve actually done better on real estate taxes, other ones such as insurance, and then also ground rent that San Diego that’s participating, those are up significantly year-over-year as the hotels have done better. There’s also some noise in ’23 when you look at the impact of Confidante and D.C., both at different stages of their renovation but both having some level of impact over the year. If we back those hotels out, looking at the gains we expect, especially driven by the group in urban hotels our expectation is, is that we will — even with the occupancy, we will have some margin increase at those hotels, but it will be minimal this year given that composition.

There are certain hotels in the portfolio — San Francisco, which was our best growth hotel in Q4, will be our best growth hotel in Q1 and will continue throughout the year. It’s a slower trajectory back to ’19 than some of the other hotels, but it’s still providing very good growth and hotel got size needs the group contribution, need the banquet contribution for its margins to increase. So year-over-year, we can ex the renovation hotels, we should be able to get some margin increase and predicated more on a much more occupancy skewed RevPAR gain.

Operator: Our next question comes from Michael Bellisario from Baird.

Michael Bellisario: Brian, you’ve been in the CEO seat now for about a year. Maybe can you give us a quick look back and look forward, what were the hits and misses over the last year? And maybe how would those shifted your forward outlook, particularly on the capital allocation side of things?

Bryan Giglia: Sure. So looking at capital allocation, since that’s our focus. Last year, there was — we had some transition in the beginning, but then got to work as quickly as we could and really set the — I wouldn’t say step to strategy but reinvigorated the strategy of focusing on capital recycling, investing in our portfolio when it makes sense and then returning capital to our shareholders. So on the investment front or on — let’s start on the capital recycling front. We were able to divest the Chicago hotels. And while — when we said this, and maybe you may have even asked this question when we sold them, our expectation was absolutely that there would be growth in the Chicago market. And — but the reason why we look to divest of them was a combination of capital needs and even though there would be short-term gains and especially in the near term, where maybe staffing levels weren’t fully up, that we knew what we saw with leisure that earnings would come back quickly.

But longer term, based on our investment tenure in that market, we knew that there were some headwinds with labor, with real estate taxes and other things. So we believe that based on where those hotels were in our investment life cycle that it was the right time to divest of them and reinvest in markets where we thought we could give more growth. And then those proceeds went into Miami, which we’re very happy with how it’s been performing and getting ready to do a major repositioning there, which we think will add significant value. And in San Diego, which was a more stabilized, there wasn’t — it was 25% interest that we bought. It’s a sizable asset, an asset that was performing really well, an asset that had money that was recently put into it that added more meeting space to allow it to increase its group component, which San Diego over the last few years did really well with transient and leisure but — and there still is meaningful leisure demand there, but that hotel needs to have a meaningful amount of group for profitability.

And last in Q4, you started seeing that hotel shift out of some of the more discounted leisure or the more traditional corporate group that comes with a meaningful out-of-room spend, and you saw the profitability of that hotel continued to increase. And based on its pace for 2023, we think that there’s even more growth there. And so that’s a hotel where our investment, while Andaz was a decent near-term cash yield with longer-term upside. San Diego was more of a near-term cash flow play where we were able to acquire the hotel at a very good yield and let that yield grow, and we continue — and we expect that to continue to grow. On the — looking at some of the other acquisitions that happened later in the previous year, you said you have some of the things that didn’t go quite as well.

The 2 wine country assets, while 2021 had incredible leisure compression, the second half of last year was — that compression went elsewhere. And so those hotels, while they were maybe geared and set up to take advantage of this ongoing leisure demand, maybe spent a little less time focusing on group. Second half of last year, we really changed that focus. And the hotels have added the appropriate amount of group business where Montage’s pace is double to what it was a year ago and Four Seasons is up 80%. Is that something we should have done earlier? Yes. And that’s something that we look at our other markets that continue to benefit from leisure demand. While in an example is somewhere where, yes, there is a lot of leisure demand. The rate is very strong, but we’re remaining — we want the hotel to remain disciplined and make sure that it has the right — always have the right group mix to it and not rely solely on leisure demand.

That’s something that the hotel is focused on and make sure that it did not give up its group for that near-term leisure. On the returning capital side, I’m very happy with what we did last year. We reinstated the dividend, and we also went — and as we said we would do is acquired our stock throughout the year. We’ve actually continued that into this year. And that’s something that we — while there are not endless capital to go out and buy stock all the time through dispositions, through additional capacity in our balance sheet or cash on hand, that’s something that we’ll continue to do. And I think what — the one thing that we’re probably proud of — most proud of last year is the balance that we had to the portfolio. We want our portfolio to be balanced in every sentence.

We want to make sure that we have the right amount of leisure, the right amount of group, a right amount of business focus, but then also in how we’re allocating capital. We need to be investing in our portfolio when the returns make sense. We need to be recycling assets and producing more growth and not just sitting on assets forever and watching those returns decline and then we need to return the capital. So sort of a long-winded way, but hopefully, that answers your question.

Operator: Our next question comes from Duane Pfennigwerth from Evercore ISI.

Duane Pfennigwerth: Just on the wine country assets. I wonder how do you think about the margin profile of those assets versus the portfolio average longer term? And how should investors be thinking about the steps required to close that gap? And it sounds like you touched on a pretty significant one with the group focus, but just how you’re thinking about the margins longer term on those 2 assets and what’s required to close the gap?

Bryan Giglia: Okay. Thanks, Duane. So I guess the easiest answer to that is a luxury hotel will not run — we’ll run lower margins than a very large efficient group box or business transient box or even limited service or that — it’s just because of the services and the level of amenities, it’s not going to run the same margins, which is fine because we’re — while margins are something that we watch closely, and we’re absolutely working on the hotels on their margin improvement, we’re more focused on value. And so the bottom line is that those hotels will be valued differently than your upper upscale average city center, urban-type hotel or even other resorts. And so what we want to make sure that we maximize the cash flow, the best we can, work with the operators.

Again, last year, there was a little bit too much confidence put on the near-term leisure. Now leisure continues to be strong, but these hotels have to have components to it. And so that’s something that we focus on. Montage for 2023 has 10,000 room nights on the books right now. It had 5,000 this time last year. That comes at a $1,000 rate. Maybe it’s a little bit lower than the transient rate, but it’s a very strong rate, and it comes with $500 plus of ancillary spend. Four Seasons has 5,000 room nights on the books for 23 and they have 3,000 last year. That’s maybe not the $1,800, $1,900 transient rate but around a $1,500 rate with $500 or $600 of ancillary spend. So it’s getting the mix of each hotel right getting that group component, which has the banquet spend in it, which is much more profitable than the other food and beverage outlets with maybe the exception of a bar.

And so it’s really getting that right, and that is where we put the focus in last year, and we’re starting to see that where you’ll see considerable — you will see considerable EBITDA growth in each hotel this year, you’ll see margin growth and — but still that margin growth as far as where — when do we get stabilized, that’s a couple of years out, probably looking into next year or so. And then — but even if these hotels are hitting it out of the park, their margins are going to be lower than the other hotels in our portfolio.

Operator: Our next question comes from Gregory Miller from Truist Securities.

Gregory Miller: I apologies if I missed this, but could you share some more detailed thoughts about the Boston market and your current sentiment of your Park Plaza and Long Wharf exposure there?

Bryan Giglia: Yes. Like other urban markets, Boston has been a great market for us. As far as the cadence of where it goes in urban market recovery, maybe not where our San Diego will behind San Diego and maybe Orlando, but farther ahead than San Francisco and D.C. So very happy with both hotels. Both hotels have had very different strategies. We invested quite a bit of capital into Long Wharf, really increasing the level of quality of the room, expanding the bathroom, the hotel — the location of the hotel is fantastic. The rooms now as far as being able to compete with other high-end hotels in the market are absolutely on par. And so at Long Wharf, we’ve been a little bit more mindful of occupancy because we’ve really been pushing the rate and been very successful at doing that.

Park Plaza is more of a transient and group box. And so where we invested there was adding additional meeting space. We put at the end of ’21, we added another 5,000 square feet of very modern functional space that mixes well with the more historic space and the rest of the building. And it allows us to push more group through there. And where we really need to be successful there or making sure that we have the right in-house corporate group and not relying on overflow from the citywide. So we have a great offering now that’s very compelling to corporate events. The pace — when we look at the pace for Park Plaza, it’s very strong and ’23 should be a great year for the hotel. And so as far as the market, the market has performed well. The hotels are performing very well within the market and long term, Boston is a market that we’re — we think very highly of.

Operator: Our next question comes from Anthony Powell from Barclays.

Anthony Powell: Just a quick question about capital recycling going forward in disposition and acquisitions. In order to sell a hotel, especially maybe a larger one, would you need to have another hotel acquired or have a good sight line to acquiring a big hotel or would you be willing to maybe sell a hotel and wait to remiss those proceeds down the road? Just curious how we match up those 2 going forward?

Bryan Giglia: Good morning, Anthony. In a perfect world, you match those up very close. I think what we’ve learned over the last couple of years is we’re not in a perfect world. So we have to be a little bit more flexible. And so one of our focuses is to — while capital recycling previously was maybe a little bit more episodic, we want to make it a more routine function for the company. And what I mean by that is that there’s 2 reasons for us to divest of an asset. The first one is that it’s opportunistic. For whatever reason, someone is going to value that hotel more than we have or we’ve — there’s some events that’s unencumbered or something where a buyer can buy it unencumbered and it creates value that way. Embassy Suite Portfolio is an example of that.

The other is — and this one is a little harder to pinpoint is the hotel for us is reaching the end of our investment horizon for the hotel. Typically, especially the better hotels, the more city center, the luxury that have hotel lodging REITs like to hang on to those because they look good on covers. They have high RevPARs. Those hotels may over time, when you look at your return on invested capital, the capital you’re putting into those assets at certain — at some point in time, will switch from being more offensive to more defensive. And then you get into the point where your return starts to decline and you’re putting in more defensive dollars. And so what we try to do now is look at each hotel, look at its life cycle, try to look out over the future and say, okay, our investment here is going to come to an end in the next couple of years.

There’s no more for us to really do or the risk-adjusted return of that investment is maybe not for us, maybe it’s for someone else. And so let’s go see if we can monetize that. Once — and we’re in the starting phases of that, once that becomes more regular, the matching up of acquisition targets becomes easier and more — just more natural. And so we do have some large assets and sometimes it’s hard to match up a large asset. And sometimes you have to take one asset and put it into 2 different assets. And that’s more work and more takes more time to find those assets than it does for just one. So we will continue to try to make this more of a regular process for us. In the near term, if we divest of something, well, we stop that transaction because it’s the right investment decision, but we don’t have anything to match it.

No, we have ways to — while it creates some lumpiness in earnings, we have ways with some NOLs and other things to shield gains and give us the time to make the right next investment. But in a — ideally for our earnings, for our investments, for our value creation, it’s best to line things up as close as possible, but knowing that’s not always possible.

Operator: Our next question comes from David Katz from Jefferies.

David Katz: I’m not sure if you’ve sort of talked about where the credit markets sit and how supportive they are for the M&A market? And just how important that will be or how pivotal that will be and you’re getting something done, say, this year?

Bryan Giglia: Yes. I mean, David, the credit markets are important. The majority of hotel transactions, especially on the private side are levered deals, which means that there has to be debt. And so if you went back a couple of months ago, those markets were not functioning really well and the spreads were wide, which led to, I think, our commentary and others commentary, there’s probably not a lot happening in the fourth quarter or even maybe the first quarter of the year. I think as we’ve got into the first quarter, there have been more transactions, debt transactions that are happening. The debt markets are becoming more functioning, but not to where they need to be for to have things really start to move. But I think they’re moving in the right direction.

And once that there — you need a couple of things. When you need price discovery and validation on asset values and then you need to know where the debt markets and that’s going to be important to figure out what LTVs are and what type of debt yields you can get. So I think we’re moving in the right direction. It is more challenging than it was, call it, 12, 18 months ago though.

Operator: Our next question comes from Floris Van Dijkum from Compass Point.

Floris Van Dijkum: The — as I look at this, I mean, it looks — you’ve made — a couple of your hotels are really firing on all fronts. I mean if I look at the Wailea and the Hilton San Diego Bayfront, both of them are ahead of ’19 levels of EBITDA. So very encouraging. Obviously, you’ve got some downtime you have to take into consideration for the redevelopment of the new ANDAs. But your RevPAR prognosis for a 30% to 32% in the first quarter and, call it, 10% to 15% for the year, looks pretty attractive. That implies rising potential margins throughout the year as well, which, again, positive EBITDA growth. I’m just curious — the — and I know it’s been touched upon a couple of times already, but the wine country assets, I mean, if I look at the yield on cost, it’s very, very minutes last year in terms of EBITDA. I mean that would imply to get your target returns, EBITDA would have to more than triple. What sort of time frame do you expect that, that could happen?

Bryan Giglia: Yes. I mean that’s going to happen different rates at the 2 different hotels. But to ask — to answer your first question, the expectation this year is that you will see meaningful EBITDA growth at both hotels. Again, the group component is a big piece of it. And if you look at that pace, it’s — look, these were 2 brand-new luxury hotels that opened up into a fantastic leisure compression market and then have to readjust their models to bring in the right mix. And we think we’ve accomplished that or at least we’re very far along the way there. And then there are different components to each hotel, Montage has starting at the end of this year or beginning of next year, the residences that are separate, but can participate in the hotel program open up.

That’s going to be another leg of growth for Montage. And then in Four Seasons, as we continue to establish it, it will continue to grow, too. But our — to your point, our expectation is, is that the 2 hotels are going to grow, call it, 40 to — somewhere 40 and 150% of where they were in the previous year. So that growth is happening. It’s somewhat of a step function. But when we look at where we have the hotels set up from a group perspective, what their group contribution is, the fact that both were awarded 5 diamond status, which is very important in the luxury world. Our confidence in our conviction on these hotels is as strong as it ever was. And when it comes to value and value creation, these hotels are going to serve our shareholders very well.

Operator: We have no further questions. I would like to turn the call back over to Bryan Giglia for closing remarks.

Bryan Giglia: We’d like to thank everyone for their interest in the company and look forward to meeting with many of you over the coming couple of months at the various conferences coming up. Thank you.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.