Sunstone Hotel Investors Inc
NYSE:SHO
Earnings Call Analysis
Q3-2023 Analysis
Sunstone Hotel Investors Inc
The company announced the sale of the Boston Park Plaza for $370 million, in line with their lifecycle investment strategy intended to add more value over time. Despite the hotel's good performance, earning $210 million of EBITDA since acquisition, substantial capital would be needed for its next renovation phase. The pending requirements were notably increasing maintenance costs and would likely not deliver the necessary returns justifying further investments. Consequently, the disposal of this asset at a solid valuation involves a strategic reinvestment of proceeds into properties with better growth potential. The sale resulted in over $1 billion in total liquidity, including cash on hand, while ensuring the company's debt leverage decreased significantly. Management emphasized an opportunistic approach in utilizing this cash, seeking to acquire new assets with high initial yields and relatively limited capital expenditure needs in the near term.
The reported third-quarter Adjusted EBITDAre was $64 million, surpassing the high end of guidance, due to robust non-rooms revenue and solid margin performance. Net debt to EBITDA ratio stood at a mere 1.4x after accounting for the proceeds from the hotel sale, solidifying the balance sheet. Looking ahead, the company's RevPAR expectations for Q4 indicated a potential decline of 0.5% to 3.5%. This anticipated drop includes the impact of ongoing renovations and disposals but also reflects ongoing operational challenges. On the shareholder returns front, the company is focused on a 100% taxable income distribution policy, shown by the recent increase in their base dividend, reinforcing their commitment to returning value to shareholders.
Operationally, the company has made significant strides, including the completion of a major brand conversion in Washington DC, advancing other conversions, and navigating an unfortunate event in Maui. They reported a minor margin headwind due to these activities but remain dedicated to driving robust hotel operations. The near-term outlook draws attention to ongoing renovations and the impact on earnings. Maintaining a balance between strategic growth through acquisitions and returning profits to shareholders is a top priority. Management's approach to capital allocation is deliberate, seeking to leverage their unique cash position in the current market for direct deal access and value creation.
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Good morning ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, November 7 at 12:00 PM Eastern time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead.
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 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 commentary on this call will contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO, and property level adjusted EBITDAre. We are providing this information as a supplement to information prepared in accordance with generally-accepted accounting principles. Additional details on our quarterly results 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; Robert Springer, President & Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer. Bryan will start us off with some commentary on our third quarter operations and recent trends, and also provide some additional color on our recent disposition at Boston Park Plaza. Afterward, Robert will discuss our capital investment activity and finally, I will provide a summary of our current liquidity position, recap our third quarter earnings results and provide some additional details on our outlook for the remainder of the year. 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.
Thank you, Aaron, and good morning everyone. We were encouraged by our performance in the third quarter as we managed to deliver earnings that exceeded expectations despite moderating leisure demand and disruption at one of our largest assets following the tragic Maui fires in early August. We have a fantastic team of associates at the Wailea Beach Resort, and we are grateful for their dedication and resilience in recent weeks. Later, we will share some additional details on the fire's impact on our third quarter results and expectations for the remainder of the year. Elsewhere across the portfolio, we continue to see solid attendance at group events and further growth in business transient demand, while softer year-over-year performance at our oceanfront resorts offset some of the urban strength we worked with our operators to mitigate costs, which combined with savings and corporate level expenses led to EBITDA and FFO above the high end of our guidance ranges.Similar to Q2, growth in the third quarter was the result of robust group business and increased corporate travel. In fact, our urban and convention hotels delivered a very strong 7.4% RevPAR growth in the quarter, driven by gains in both occupancy and rate. Washington DC led the portfolio growing RevPAR by more than 34% in the quarter as the hotel begins to benefit from our investment to reposition it as a flagship Westin and making it one of the premier convention and transient hotels in the city.The renovated hotel looks great with fantastic guest rooms and bathrooms expanded and fully redesigned meeting space, a vibrant modern lobby and the largest hotel fitness studio in the city. The former Renaissance was relaunched as the Westin Washington DC Downtown last month and will contribute to meaningful growth in the coming quarters as the hotel is now attracting higher quality groups and appealing to a broader set of transient travelers.On the other side of the country, The Hyatt Regency San Francisco continued to rebound in the third quarter, growing RevPAR 20% over prior year and capturing incremental share from nearby hotels as well as those in Union Square. We remain encouraged by the hotel's ongoing recovery and expect to see further growth as the hotel capitalizes on its recently renovated rooms and abundant meeting space to create its own group compression and not solely rely on the convention center in citywide events. We also saw strong growth at our hotels in Boston and Long Beach driven by increased business travel and corporate group events.Consistent with recent trends, operating fundamentals at our resorts continued to normalize as domestic leisure destinations faced increased competition from U.S. travelers going abroad without offsetting benefit of inbound foreign visitation. This was most apparent at our Florida coastal hotels, which saw further moderation as travelers opted for other destinations and vacation options that had been limited in the last 2 years. Despite this, our 2 Florida resorts maintained average room rates that were 45% higher than the third quarter of 2019.While the Wine Country assets were also impacted by the softer leisure backdrop, they performed better than our other resorts. As we have discussed on prior calls, we have been working with our operators to grow the group base at both of the resorts. We began to see the benefits of those efforts in the third quarter with each resort growing EBITDA and margin even without the compression from transient demand. In fact, the Four Seasons Napa Valley led the portfolio in total RevPAR growth at 30% with added contribution of robust out-of-room spend from more group events.As we communicated during the quarter, we were very fortunate that none the hotel associates at the Wailea Beach Resort were harmed during the fires on Maui and that the hotel did not sustain any physical damage. In the aftermath of the fires, the hotel team partnered with the World Central Kitchen to prepare and distribute more than 8,600 meals to members of the community.In addition, the hotel team has worked diligently to minimize the impact on staff and operations by quickly pivoting to alternate sources of demand in the weeks following the fires. We estimate that the third quarter total portfolio RevPAR growth was negatively impacted by 75 basis points, and that EBITDA was $1 million lower as a result of the demand disruption caused by the fires. This is on the low end of our initial estimates and speaks to the quick coordination of the hotel team and the desirability and strength of the market.While we are certainly encouraged by how the Wailea market has performed in recent weeks, the outlook that Aaron will discuss later accounts for some lingering earnings disruption in the fourth quarter that we think is prudent to plan for while we further monitor trends leading up to the high demand festive season. Overall, the disruption from the Maui fires and the continued moderation of leisure demand at our oceanfront resorts offset the growth from our urban and convention hotels and contributed to flat RevPAR in the third quarter. On an adjusted basis, after factoring in the impact from Wailea, our third quarter RevPAR growth was just above the midpoint of our guidance range.We were pleased to see that out-of-room spend remains strong and came in above forecasts again this quarter, benefiting from continued increases in group activity and increased ancillary revenues. Banquet and AV sales per group room was $222 in Q3, continuing a positive trend, which was above 2019 on a comparable basis. Our urban and convention hotels saw strong out-of-room spend with Boston Long Wharf, Renaissance Long Beach, The Western DC, The Bidwell Marriott Portland and Hilton San Diego Bayfront, all generating spend per group room above third quarters of 2022 and 2019. Including the robust out-of-room spend, our portfolio generated an additional $125 of revenue per available room in the quarter for a total RevPAR of approximately $348, an increase of 1.3% from last year.As the demand environment evolves, we are working with our operators to drive efficiencies and mitigate costs. Wage growth continues to ease in most markets as more of the excess pressures come out of the labor market. Food and beverage costs also improve relative to prior year, driven by a combination of easing inflation, menu optimization and a higher mix of banquet business. The third quarter also includes the impact of our recent property insurance renewal and the impact of the short term business mix shift in Wailea following the fires.Despite the various cost pressures, our total portfolio generated an EBITDA margin of 27% in the third quarter, which was only 140 basis points lower than the same quarter in 2022 even with the headwinds from the disruption in Wailea and the impact of our property insurance renewal, which combined accounted for 90 basis points of lower margin.Now turning to segmentation, our portfolio generated 186,000 total group room nights in the quarter, and the group segment comprised roughly 36% of total demand. Q3 group room night volume represents approximately 90% of comparable pre-pandemic amounts with average rates 13% higher leading to total comparable group room revenue that was just ahead of the same quarter of 2019.For the total portfolio, group room rates and room nights were each higher by nearly 5% contributing to an 11% increase in year-over-year group room revenue. Group production for all current and future periods in Q3 was 160,000 room nights resulting in a 3.4% increase in group production relative to last year. Excluding the Confidante, which is now under renovation, group pace heading into the fourth quarter is 6% higher than 2022, driven by increases in both room nights and average rates.In terms of transient business, which accounted for 58% of our total room nights in the quarter, comparable rate came in at $299 or 16% higher than the pre-pandemic levels we saw in the same quarter of 2019. For the total portfolio, the transient rate was $319 and was down to the prior year driven by normalizing leisure demand and the shift in the mix of business at Wailea as first responders and other event-driven business came into the market at lower rates than what would typically be generated from leisure guests. Partially offsetting the decline in leisure volume was a 20% increase in revenue from the corporate negotiated channel as business travel continues to grow. We are particularly encouraged by stronger trends at our hotels in Boston, New Orleans, Long Beach, San Francisco and Portland.Shifting gears to our recent transaction activity. Recently, we announced the sale of the Boston Park Plaza for $370 million. This disposition is consistent with our lifecycle investment approach and one of the ways we will create value going forward. While Park Plaza has been one of our best-performing hotels and its operating at close to prior peak performance, it was also facing significant upcoming capital needs, which would include meaningful displacement that most likely would not provide the returns necessary to justify the total investment.We acquired the hotel in 2013 and executed our business plan to renovate and transform the well-located yet undercapitalized hotel, ultimately doubling its cash flow. While the hotel performed well for us, generating $210 million of EBITDA since acquisition, we remained focused on the hotel's future return trajectory. Typically, as hotels get older, a larger percentage of capital investment is defensive as a result of physical or functional obsolescence. At Boston Park Plaza, we were investing millions of dollars each year just in infrastructure and building systems to keep the a 100-year-old building in good operating condition.As we look forward to the next renovation, we were increasingly aware that while our initial renovation played to the hotel's strengths, its public spaces including elaborate meeting space, a grand lobby and an impressive gym. The next renovation we need to address its shortcomings, including the 249 square foot average guest room size and inadequate bathrooms, both of which will be expensive and highly disruptive to earnings. And so it was our view that the amount of capital needed to sustain the current level of earnings was going to be meaningful and the resulting yield on our investment would most likely decrease if we were to continue to own the hotel.So consistent with our strategy to actively recycle capital based on our investment lifecycle approach, we sold the hotel at a strong valuation in an all-cash deal and are actively evaluating opportunities to redeploy proceeds into assets that have a more compelling future return profile. We have sufficient NOLs to offset any gains resulting from the sale, and so we can be thoughtful as we evaluate reinvestment opportunities and not be constrained by the timing limitations associated with a 1031 exchange.In addition, the timing of the disposition aligns well with the seasonal nature of the operations as the hotel has historically not generated positive earnings from December to February, which gives us time to pursue reinvestment opportunities without the related drag on earnings. Many of you have asked how will we deploy the proceeds? We believe that successfully recycling this capital into a superior growth hotel is pivotal to our ability to add value and finding the right acquisition for a combination of the right acquisition and incremental share repurchase is paramount.We are beginning to see the gap between buyers and sellers converge, and we believe that we will be able to identify opportunities that have comparable initial yields, no immediate capital needs and overall growth that will surpass the all-in-investment yield we would have generated with Boston Park Plaza. We have time on our side to make the right capital allocation decision and we have cash, which in this environment is unique and has already provided us access to direct deals. Let me be clear, at this moment, we are looking to acquire hotels at compelling going-in yields with limited near term capital needs, and where we can add value either through asset management initiatives or which present opportunities to unlock value through capital investment later in the course of our ownership.Given the embedded future growth we already have in the portfolio from our deep turn transformation of the Andaz Miami Beach and the ramping resorts and Wine Country, a good cash flowing investment now at the right price will provide diversity to our earnings, maintain our strong credit metrics and still provide us with opportunity to create value. We expect to balance this with incremental share repurchases when our stock price warrants it.To sum things up, it has been a busy few months here at Sunstone as we wrapped up work on one major brand conversion in Washington DC, started work on 2 others in Long Beach and Miami, responded to the tragic situation in Maui and completed a solid execution of the Boston sale, and we did all this while still focused on our day job of driving strong hotel operations, which allow us to deliver earnings ahead of expectations. While the operating and capital markets environment present their own challenges, the entire team remains committed to delivering strong returns and creating value for our shareholders.And with that, I'll turn it over to Robert to give some additional thoughts on our renovation progress and upcoming capital investments.
Thanks. As Bryan noted, the third quarter was a productive one for us. After a multi-year renovation, we converted the former Renaissance to the Westin Washington DC Downtown in early October. The transformation has been remarkable with a fully refreshed hotel that incorporates the Westin brand signature biophilic design elements. We are very pleased with the initial response and the type and volume of bookings the hotel is already attracting. As some of you may have seen in our presentation from September, we finalized the renovation scope for Andaz Miami Beach and the demolition work began last month. In addition to the renovation scope we outlined at the time of acquisition, we have also identified several additional ROI opportunities that we expect will enhance earnings at the resort. We are excited to partner with Jose Andres Group to debut Bazaar Meat in Miami Beach. The signature dining concept will not only enhance the luxury experience of the resort, but will also be a destination to attract non-hotel guests to the property and drive additional revenue and earnings for us. Our total repositioning investment is estimated at $70 million, and we continue to expect the hotel will deliver an 8% to 9% yield on our all-in basis in the resort upon stabilization.As we have shared with you before, our business plan at Andaz is very similar to what we did at Wailea Beach Resort, which is to reasonably elevate a well-located resort and position it to benefit from its higher rated luxury neighboring properties. We employed a rational approach to our underwriting, which focused on the pre-pandemic rate environment in Miami Beach, and while leisure travel patterns have been normalizing following tremendous upward momentum in rates coming out of the pandemic, the resulting current rates in the market are still meaningfully ahead of 2019 levels, which gives us increased confidence in our ability to create value at this asset.As I noted earlier, work began last month, which included the demolition of the backyard area. Renovation work on the public spaces and guest rooms will occur in phases during the first 3 quarters of 2024. We will have additional details to share with you on the specific cadence of the work and its impact on our quarterly earnings as part of our fourth quarter call in February. Elsewhere across the portfolio, work is also underway to convert our Renaissance in Long Beach to a Marriott. The project will be substantially complete by the end of the year with the plan to relaunch the hotel under the Marriott brand in March, 2024, which should drive incremental earnings at the hotel.While the transaction market remains challenging, there are deals getting done and recycling capital continues to be a primary component of our strategy. Now that we have harvested the gain from the Boston Park Plaza, we have considerable investment capacity and we look forward to sharing additional information our progress and we seek to redeploy these proceeds into new growth opportunities.With that, I'll turn it over to Aaron. Please go ahead.
Thanks, Robert. The sale of Boston Park Plaza further bolsters what was an already strong liquidity position. Including the net proceeds from the sale, we have nearly $540 million of total cash and cash equivalent, including our restricted cash. We retain full capacity on our credit facility, which together with cash on hand equates to over $1 billion of total liquidity. We have addressed all debt maturities through December, 2024, And as of the end of the third quarter, our pro-forma net debt and preferred equity to EBITDA stood at 2.6x, and our net debt to EBITDA was only 1.4x as the net proceeds from the Boston Park Plaza sale will reduce overall leverage by about one turn until they are reinvested.Shifting to our financial results, the full details of which are provided in our earnings release and are supplemental. Adjusted EBITDAre for the third quarter was $64 million, which was above the high end of our guidance range, driven by higher non-rooms revenue, better margin performance across the portfolio and lower corporate level costs. We estimate that our third quarter results were impacted by approximately $1 million of lower earnings due to the fires in Maui, and $2 million of displaced EBITDA related to the renovation work at our hotel in Washington DC. Adjusted FFO for the third quarter was $0.23 per diluted share, which was also above the high end of our guidance range.As we look to the fourth quarter, we expect that total portfolio RevPAR will range from a decline of 3% to a decline of 6% as compared to the fourth quarter of 2022. This range does not include Boston Park Plaza due to its sale, but does include the Confidante Miami Beach, which is now under renovation. If we exclude the Confidante, our expected year-over-year RevPAR change in the fourth quarter ranges from a decline of a 0.5% to a decline of 3.5%. Both of these estimated RevPAR growth ranges include the Renaissance Long Beach, which is currently undergoing renovation work in advance of its conversion to a Marriott, and which is contributing to 75 basis points of lower growth in the fourth quarter, but should turn into a tailwind starting in the second quarter of next year. For reference, the Q4 2022 RevPAR for the current total portfolio was $211 and the Q4 2022 RevPAR, excluding the Confidante was $212.We estimate that fourth quarter adjusted EBITDAre will range from $48 million to $53 million and our adjusted FFO per diluted share will range from $0.14 to $0.17. Given the seasonal nature of operations at Boston Park Plaza, we expect that the earnings generated during our ownership period in the partial month of October, combined with the interest income on the net proceeds we will receive for November and December, will account for the vast majority of the earnings that we would have reported have we owned the hotel for the full quarter.While we have been pleasantly surprised by how the Wailea market has performed in the weeks since the fires, as Bryan alluded to earlier, we have adjusted our fourth quarter outlook for the resort downward to account for some lingering risk as we move into the busy holiday period, which together with the variance related to the Boston sale results in $2 million to $3 million of lower EBITDA in Q4 as compared to our expectations as of the prior quarter. While the fourth quarter was expected to be the most challenged of the year in terms of top line growth, we are encouraged by the recent short term booking trends we have seen across the portfolio.Weekly transient pickup for the next 6 months has exceeded last year for each of the prior 4 weeks. This in part driven by recent strength in Wailea where room nights on the books for the peak best of period are now ahead of last year. As we noted in our press release this morning, we now expect our full year total capital investment in the portfolio to be between $110 million to $120 million, which is a reduction of $25 million as compared to the midpoint of our initial range at the start of the year.As we now expect a larger portion of the investment associated with the conversion of Andaz Miami Beach to be incurred in 2024 as opposed to the current year. Based on the renovation timelines, we expect to incur a total of $12 million to $13 million of EBITDA displacement in 2023 with approximately $9.5 million of that total already incurred through the third quarter. As Robert mentioned earlier, we will share additional details with you regarding our 2024 capital plans as part of our next quarterly earnings call.Now shifting to our return of capital. Since the end of the second quarter, we repurchase $16 million of additional stock, bringing our year-to-date total to $38 million at an average price of $9.26 per share. A meaningful discount to consensus estimates of NAV and a compelling implied multiple on our earnings. We anticipate that our Board will declare a fourth quarter cash common dividend that will include the recently increased regular quarterly amount of $0.07 per share, plus an additional amount intended to more fully distribute our expected taxable income for the year. Similar to our practice prior to the pandemic, we expect to declare this dividend in December, which will be payable to shareholders of record as of the end of the year. Separate from the common dividend, the Board has already declared the routine distributions for our Series G, 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.
[Operator Instructions] Your first question comes from the line of Dori Kesten with Wells Fargo.
I guess 1.5 questions. With the pushback of CapEx then, do you still expect the renovation rebranding of Andaz Miami Beach to be completed in '24?
Dori, yes, with the movement that we had in the spend that's really just fine-tuning when the money will be going out the door and has really nothing to do with our ultimate completion date. We had a little bit more ability. In the beginning we didn't have the schedule locked down, so we didn't know exactly when things would start and when money would start going out the door, but now that we have been able to start the construction, which is going on right now we just fine-tuned what our spend would be and when that would be. And so the completion date is still on target.
And then can you just walk through your material headwinds and tailwinds to EBITDA that you have that you can see today for '24 just beyond general market conditions?
Sure. So starting with the markets that we're in for '24 from a citywide standpoint DC is a strong market, New Orleans and San Diego are all strong on the citywide calendar next year. DC will also benefit from the comping over the renovation year and then also the benefits of what we're seeing with the Westin brand, which should come in group room nights and transient room nights, and also in rates I think pace is pretty significantly for the hotel next year as we start working back to our target group room budget that we have for that. So success in DC is going to be making sure that we layer on the right mix of group at the right time of year. DC does have some seasonality to it. So in the prime time really leveraging off the Westin brand being able to get the higher end corporate group and then bringing in higher end association in some of the shoulder periods too. And then using the appeal of the brand to drive more transient business than we were able to as a Renaissance. Looking out at the others, obviously we have the Andaz that will be under construction until the end of the year, so that will be a headwind.Long Beach as Aaron mentioned, we have it in the renovation starting in Q4 this year. We'll go into Q1 of next year and then start to ramp up after that the brand change will be beneficial to the hotel but the renovation is really a slightly upgraded routine renovation that we would've done anyway, and so the timeframe is pretty condensed and the disruption period will be minimal. Looking out for the rest of next year also, as far as the rest of the portfolio, we would expect the urban and group hotels to continue to lead.There's probably some more occupancy in the portfolio is when you look at the composition between occupancy and rate, we probably expect to get a little bit more occupancy next year. And then certain markets, San Francisco is rough on the citywide calendar, but based on our ability to drive in-house group and take advantage of the corporate and business transient travel that we've found in the financial area and in Embarcadero we would expect to continue that. But that market we have significant year-over-year growth this year that's obviously going slow as the hotel lapse over the comps from this year.
Your next question comes from the line of Smedes Rose with Citi.
I just wanted to ask you if you could talk a little bit more about the sort of transaction market and maybe how you're thinking about the redeployment. It sounds like you'd like to go in at stabilized yield to maybe the sort of longer term opportunities over time, but not kind of the massive conversion sort of opportunity necessarily like you're doing at the Andaz now. And I'm just wondering, are those deals available at 12x EBITDA or you willing to maybe pay slightly higher going in because you feel like over time you can get a better value or just help us sort of think about your thoughts there and maybe so what kinds of hotels are we looking at? Urban resort all things equal?
Absolutely. So when you look, just I'll spend a second on the transaction market and then move to us specifically. So we mentioned on the call that we are starting to see some convergence in buyer and seller expectations. To add to that, that is more skewed to the urban and group hotels than the resort hotels. I think what we are seeing now is pricing is closer to our expectations and more rational on that type of hotel than the resorts. The resorts are obviously trying to determine what the normalized leisure demand is. The last couple quarters have obviously been soft in many resort and higher end resort markets combined that with some coastal insurance costs and what the resorts were doing 9, 12 months ago. Sellers sometimes get locked in on a value and it takes a while to come to a view of what current market is. So when talking about types of hotel, I think it would be more likely that we are going to find what we are looking for. And again you mentioned it, but what we're looking for is a strong going in yield. When we look at recycling out of Boston and Boston is a great market, and Boston Park Plaza is a great hotel and we talked about the many reasons why it was time for our ownership to be done there.But a strong yield going into come close to or match that is going to be important. Minimal near term capital or near term capital needs will be important also. We have our big turn going on. We have DC that came off of renovation and is now ramping up, which is fantastic. We have Andaz where we believe we are adding significant value, but we understand that we have a portfolio right now of 14 hotels, so we can't have 4 Andazes as there are 2 Andazes at the same time. It's too disruptive. And so that is while something, maybe if an asset has something longer term that we can queue up for a year or 2 or 3 down the road, that's great, but that's not something we're looking for right now. I mean, the other thing that we have is we have cash, and so we do have access to more direct deals. People are coming to us.Now we have to make sure that we're finding this right deal. And while in an ideal world, we would do a 1031 exchange, and that's how it's set up right now with a portion of the proceeds from Boston. We don't have to do that. We have NOLs. we have a seasonality from Boston that's on our side that will ease the FFO impact for a while, but at the end of the day, we need to make the right transaction or the right balance of transactions, which is important to the portfolio to alleviate any sort of concentration risks we may have to add diversity to the portfolio into our cash flow stream.But at the end of the day, it will be a balance between that and other opportunities which will in the near term could be share repurchase. It has been part of our capital allocation strategy and execution over the last 8 quarters. And we'll most likely continue to be. And so while we're focused on finding this right deal for the portfolio, we're not going to be rushed into doing it and we are aware of other opportunities we have to deploy capital.
Your next question comes from the line of Duane Pfennigwerth with Evercore ISI.
What sort of payout ratio are you targeting for the top up dividend in 4Q, basically annual as a percent of AFFO?
Dwayne, I'll start with that and then Aaron can get into some of the specifics. We're targeting to distribute a 100% of our taxable income. I mean, that's and the payout ratio sometimes is easier for other asset classes. I think for lodging it and feedback we've received from shareholders is that pay out your taxable income. And last quarter, we upped our base dividend to $0.07 a share to reflect on a run rate basis close to where our taxable income would be in a multi-year basis, knowing that it's almost impossible to do in lodging to set that because of the cash flow will move. And so if you look at that on a run rate basis, you've got 2 quarters of the $0.07, you have 2 quarters of the $0.05, so there's $0.04 of embedded catch up there. And then whatever our taxable income is for the rest, we would then pay out that balance. Aaron?
Yes, so just to add some extra color to what Bryan was saying. And ultimately the final determination of the amount of the dividend will be something that the Board decisions, but well, the Board will decide, but I can kind of share with you some of the data points that might go into that decision-making process. So as Bryan noted, we did increase our regular run rate dividend by about 40% from $0.05 to $0.07 a share. And then as we have done in the past, we have sized the catch up or the top up dividend, as you noted to effectively approximate our remaining undistributed taxable income. And so that's a number that's going to kind of continue to move around as we move towards the end of the year. But I think kind of a realistic run rate for that right now might be an incremental, call it $0.05 to $0.07 per share in addition to the base quarterly $0.07 amount, so that we'd be looking at something kind of in the neighborhood of to $0.12 to $0.14 per share. And then as Bryan had alluded to the increased $0.07 run rate would effectively have picked up and distributed the bulk of that income had we assumed it had been in place for Q1 to Q4. And in addition to the dividend, we've also have done the share repurchase activity that Bryan mentioned. So we'll be back around in December consistent with past practice to declare that final dividend. And so once the Board has made that decision we'll make that note.
And then just on the Wine Country assets, can you speak to what drove the improvement? I know you talked about some revenue management changes in tweaks in the past. Was it more cost savings? Anything you could highlight that you felt drove that improvement?
Absolutely. It was a bit of everything. We've talked about the strategy of adding the right amount of group into these hotels, which were able to realize in the quarter still working against a difficult leisure backdrop, especially a luxury leisure backdrop. So when you look at the 2 hotels, the Four Seasons had much more group on the books than Montage did. But when you look at this type of hotel, when you look at Wailea, even a San Diego, it helps to not only focus it at RevPAR but also to look at total RevPAR. And while RevPAR was down at Montage and up at Four Seasons, total RevPAR was close to flat at Montage and up significantly at Four Seasons. And the reason for that is that to get the group business in there, you want to rationalize the rate and to make sure that the rate is the appropriate rate, because at each of the hotels that you're getting somewhere between $800 and a $1,000 a night per group room of ancillary spend that combined with some of the efficiency initiatives that we started to undertake beginning at the Montage and then rolling some of those over to the Four Seasons, the Montage is farther ahead at that point, and you can see that in the profitability. So it really is bringing in the right group, bringing in the right group at the right price and then making the operation as efficient as possible. And in Q3, we start to see what these resorts can produce, and once that leisure component starts to come in we'll then be able to really realize what these resorts can do.
Your next question comes from the line of Michael Bellisario with Baird.
Just one more clarification the tax. If you don't do a 1031, you'll have less or maybe presumably no NOL left for '24 and beyond, so then you'd have more upward pressure on the dividend in the out years. Is that correct? If there's no 1031, is that the right way to think about the bucketing?
So first of all, with the NOLs, we're sitting at --
Yes. Mike, the gain that's anticipated for the sale of Boston is approximately $150 million or so. That is within our the amount of NOLs that we have in totality, which is kind of around $350 million or so. So we would have incremental capacity on top of the Boston sale if indeed we did not 1031 that transaction.
So we would still have several $100 million of NOLs to shield future gains. And then just from a technical standpoint, then if you look at, if we were to do a 1031 Mike, you go back far enough and for those that do, the Boston basis was a continuation of the Rochester basis. And so the depreciation shield of that hotel is not as large as you would expect it to be, given the size of the hotel. And so if we were to do a 1031, then that lower basis would go into the new acquisition. If for whatever reason we did not find something appropriate within the 1031 timeframe, and we were to use our NOLs to shield that, we would actually -- and then actually acquire something, we would have a higher depreciation basis, which would put less pressure on dividends going forward, because then our basis would step up to the actual value of whatever asset we were buying.
And that is from the way back machine. My second question, just on the expense side, probably for Aaron, just can you walk through some of the margin headwinds that you saw in the third quarter and then what's embedded in your fourth quarter guidance on the margin front?
Sure. So again, I think the one that's most obvious that we've been well-publicized is property insurance. So as we think about the renewal that we did was on effectively July 1, so Q3 was the first quarter of the new run rate, and that accounts for about 60 basis points of margin headwind. and then on top of that, we had an incremental 30 basis points of margin headwind just from the situation in Wailea and the change in the mix of business that we had there. And kind of elsewhere across the portfolio, we've seen some moderation in wage rates and kind in that kind of 4% to 5% area and then a bit of relief in utilities and a couple other operating expenses. But the primary one is, it was property insurance renewal.
Your next question comes from the line of Chris Woronka with Deutsche Bank.
So with the announcement on Renaissance Long Beach going to Marriott, I think we'll have one Renaissance left, right down in Orlando. I know you've sold or converted a bunch. So I guess the next logical question is there a next up plan for the Orlando Renaissance?
Good question. So when trying to pick what brand is best for any asset, sometimes the brand's just not available. And so it's already in the market, there's area protections, there's saturation, and so that always comes into play. And if you look at the Orlando market, there's a lot of everything there. So that would be the first hurdle. When looking at the Renaissance brand and what we found, because we have been a large owner of Renaissance over time, is that it's kind of a bifurcated result. And what I mean by that is from a group perspective, if you have a great group box and you have good meeting space and good amenities and high service levels, it can really perform well. The Renaissance Washington DC from a group perspective, did a fantastic job. It held its own and it kept market share and performed really well. Where it didn't do as well was on the transient side, because while a group customer can come and understand the product and walk it and see what their clients are going to get, the transient customer doesn't have that ability. And so they go with what they're familiar with or what they have experience with. And the Westin brand from a transient standpoint is just much better.Marriott brand is a stronger, better identifiable brand. So in Orlando, we have fantastic meeting space. We have the ability to give the group more space per group room than they would typically get in another hotel. We also while it's an almost 800 room hotel, it's smaller when you look at the size hotels that you can find in Orlando. And so a group can have run of house and they can they can control -- they're not group #2 or #3 in-house. They can be the main group. And so reasons like that, Orlando has done really well.From a leisure standpoint in Orlando, it's always going to fall behind the parks. It's sort of a convenient in-between location, between Universal and Disney, but it's in between universal and Disney too. And so from that standpoint, I think Orlando can continue to do very well as is. Now, there may be some things longer term that we can do to make it a little bit more appealing to the leisure side given that market. But as far as what we've done with some of the other hotels does that mean we have to do something with Orlando? No, Orlando can do just fine and really do well as a Renaissance as it has done.
Your next question comes from the line of Anthony Powell with Barclays.
I guess a question on Maui. It seems like trends before the wildfires were actually pretty good, especially relative to some of the other leisure markets. Where do you see Maui in terms of this normalization trend we talked about across leisure? Is there more to come there or do you think Maui may be able to avoid some of that normalization once you kind of factor out the impact of the wildfires?
So Maui had done really well last year and this year, and didn't see the initial wave of the leisure normalization as some of the other coastal markets did. Our expectation for Q3 prior to the fire was that we were going to start to see that in Maui and that we would see some leisure pullback. And we were starting to see that in the beginning of the quarter. And then we, at that point, right prior to the fire, we started seeing transient reservations pick up. And so we were encouraged that Maui was going to weather that storm pretty well. And then unfortunately the fire happened and that changed the dynamic of the entire market and changed Wailea for a period of time where the mix of business was completely different. And the hotel did a fantastic job of taking care of all the associates at the hotel and then taking care of the guests, which were not their typical guests. They were guests that were either displaced or going to help during the day. And so while the hotel was running at a decent occupancy, there was really no one around during the day, and that's not really how that hotel works.And so one, we've been very pleasantly surprised at how quickly the market and the Wailea market has reverted back to its normal business. And as we go forward and we look into Q4, there is some on the shoulder periods and going into through October and into November, it's a little, leisure is softer than what it was, but we are really encouraged by what we're seeing with during the festive weeks.So once you get into the holiday season, we're actually trending ahead of last year, and like we saw before the fires back in July and then to the beginning of August, we're starting to see that transient pick up again going into the fourth quarter and into next year. So the answer is there's been a lot of change happening in Maui over the last few months, so we're going to need to see how things normalize. But from what we've seen so far, it's more encouraging than maybe some of the other leisure markets, but to your initial question, it's not immune from it. But it seems to have fared better and what we're seeing right now is definitely encouraging.
Your final question comes from the line of Floris Van Dijkum with Compass Point.
Bryan, maybe just to follow up on Smedes's question in terms of reinvesting some of the proceeds, you talked a little bit about some of the things you're considering. Obviously one of the other things to think about is have you considered as opposed to buying one asset splitting that up into 2 assets or reducing the capital need, are there tax implications with that or can you still, 1030 wanted if you split it among a couple of assets?
Yes, you can definitely exchange. Floris, you can definitely exchange into multiple assets. And that's something that we are absolutely looking at because additional diversity in the portfolio would be a plus. So that's something where we're absolutely evaluating. Again, I think based on what we're seeing now, it looks like it is skewed more towards the urban group type hotels. And again, it doesn't have to be all, or it doesn't have to be, and it will not be all or nothing. It can be a partial 1031 exchange, and then we might wait for a bit if we're not finding the deal. Remember, we understand that it's important to if we're going to deploy capital into an asset right now, it has to be a good deal. And we are out there trying to identify and using the leverage we have to find a good deal. If it doesn't, then we will let the 1031 expire, we have the option to use the NOLs to hold on to that capital, but then we'll also most likely be deploying that capital into our own stock depending on where our price is. And that I think over the last 2 years, we've given a lot of data points of where we think that that price is. So that's something where I think we've been as active as anyone and have demonstrated that we are absolutely not shy of deploying money through into our own currency. So the answer to your question, yes, it can be multiple assets. It may be multiple assets, it may be 1 asset, we will have more information as time goes on, and we will absolutely update investors in the market on that.
And may maybe if I can have the follow on that. What we're hearing from the market obviously is that larger assets, because the financing markets are more difficult, tend to trade at bigger discounts than smaller assets. How do you weigh those 2 if you're potentially buying smaller assets that might where the bite size is maybe a 100 million or less versus maybe getting a perhaps slightly more attractive yield on something that that is a larger size?
It is like everything, it's a balance and it depends on the opportunity. And well is there a size that while it could be a good deal, might start to get too large or create concentration risks in the portfolio, then that's something we would have to evaluate. I think the sweet spot here of what we would be looking for would be something to deploy a portion of the proceeds into and leave some remaining proceeds to deploy through stock or through another asset at a later time. But if you look at what we've done in the past, I think we've been pretty balanced. So that's what we'll continue to look to achieve.
Ladies and gentlemen, there are no further questions at this time. I'll now turn the call back over to Bryan Giglia, Chief Executive Officer for closing remarks.
Thank you everyone for your interest, and we look forward to seeing you at upcoming conferences and meetings over the next month or 2. Thank you.
Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.