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Edited Transcript of XHR earnings conference call or presentation 31-Oct-19 5:00pm GMT

Q3 2019 Xenia Hotels & Resorts Inc Earnings Call

Orlando Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Xenia Hotels & Resorts Inc earnings conference call or presentation Thursday, October 31, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Atish D. Shah

Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer

* Barry A. N. Bloom

Xenia Hotels & Resorts, Inc. - President & COO

* Lisa Ramey

Xenia Hotels & Resorts, Inc. - VP of Finance

* Marcel Verbaas

Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO

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Conference Call Participants

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* Aryeh Klein

BMO Capital Markets Equity Research - Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* Dori Lynn Kesten

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Xenia Hotels & Resorts, Inc. Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Lisa Ramey, Vice President, Finance. Please go ahead.

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Lisa Ramey, Xenia Hotels & Resorts, Inc. - VP of Finance [2]

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Thank you, Andrew. Good afternoon, everyone, and welcome to the third quarter 2019 earnings call and webcast for Xenia Hotels & Resorts. I'm here with Marcel Verbaas, our Chairman and Chief Executive Officer; Barry Bloom, our President and Chief Operating Officer; and Atish Shah, our Chief Financial Officer.

Marcel will begin with an overview of our third quarter results and highlights. Barry will follow with additional details on our results as well as a discussion of our capital expenditure projects. And Atish will conclude our remarks with a discussion of our current balance sheet and revised 2019 outlook. We will then open the call for Q&A.

Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, October 31 2019, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in this morning's earnings release. An archive of this call will be available on our website for 90 days.

With that, I'll turn it over to Marcel to get started.

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [3]

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Thanks, Lisa, and good afternoon, everyone. The U.S. lodging industry has continued to see muted growth in revenues with third quarter RevPAR up only 0.7%. The upper upscale and luxury segments outpaced the overall industry slightly, with RevPAR growth of 1.1% and 1.3%, respectively, for the quarter. Against this backdrop, our portfolio experienced a solid quarter, particularly as it relates to rooms revenues. Same-property portfolio RevPAR increased 2.5% compared to last year during the third quarter as occupancy increased 140 basis points and ADR increased 0.6%.

Our results were primarily driven by strong performance in July and August, with RevPAR up approximately 4% for each month, outperforming our expectations for the summer months. September was the most significant contributor to the third quarter results and, as we had been anticipating, proved to be more challenging than July and August. We had long identified meaningful group demand shortfalls in September. And while transient production for the month was substantial and encouraging, RevPAR decreased by 0.8% as a result of this relative lack of group demand.

Unfortunately, Hurricane Dorian also negatively impacted results in September as we experienced a significant number of cancellations at our hotels and resorts in the Southeast during and after Labor Day weekend.

Although rooms revenues increased at a relatively healthy pace in the third quarter, the shortfall in group demands in the month of September and the impact of Dorian contributed to challenges on the food and beverage side. We had particularly strong catering demand in the third quarter of 2018, which did not repeat this year. As a result, our same-property food and beverage revenues decreased by 1% for the quarter, which limited our third quarter growth in total revenues to 1.6%.

For the quarter, our adjusted EBITDAre was $62.6 million and our adjusted FFO per share was $0.47, increases of 3.4% and 2.2%, respectively. As I mentioned, Hurricane Dorian disrupted operations at 7 of our hotels and resorts during the quarter, including our properties in Key West, Orlando, Savannah and Charleston, South Carolina. We estimate that the negative impact to adjusted EBITDAre was approximately $500,000, and we do not anticipate recovering any of this lost income through business interruption insurance.

We remain diligent and successful in controlling expenses across the portfolio. Our operators continue to find efficiencies, particularly in the rooms and food and beverage departments. As a result, same-property EBITDA margin for the quarter declined by only 16 basis points on our same-property revenue growth of 1.6%. We believe this is an excellent result in an environment where increase in labor costs and fixed expenses, including real estate taxes and insurance, continue to put pressure on operating margins.

Our portfolio's performance on a year-to-date basis has been strong as our same-property RevPAR increased 2.6% through the end of the third quarter. Our total portfolio RevPAR, which, as a reminder, measures our portfolio results on an as-owned basis, was 4.7% higher than last year through the third quarter, due in part to the improvement in quality of our portfolio through the transactions that were completed in 2018.

Year-to-date, same-property EBITDA margin has improved 39 basis points, with rooms expense essentially flat to last year on 2.6% rooms revenue growth and food and beverage expense up only 0.6% on 1.7% of F&B revenue growth. While our performance as it relates to margin improvement over the past few years has been outstanding, the operating environment continues to be challenging and we anticipate that they will become increasingly difficult to maintain margins if RevPAR growth does not accelerate from current levels.

While we are pleased with our third quarter and year-to-date results, the U.S. lodging industry is experiencing headwinds resulting from supply increases, pockets of weakness in demand as well as labor and other cost pressures, and our portfolio is not immune from those factors. Atish will outline our expectations for the remainder of the year and how the current environment is impacting our fourth quarter forecast later during the call.

Our overall strategy of owning uniquely positioned luxury and upper upscale hotels in a variety of top 25 lodging markets and key leisure destinations continues to prove itself in our results. We have seen outperformance across our portfolio relative to the market during the quarter and year-to-date, including in gateway markets such as San Francisco, and in several of our Sun Belt markets such as Dallas, Houston, Phoenix and Orlando. These markets offer diverse demand generators for the group, leisure and corporate transient segments, enabling us to successfully optimize mix at our properties.

In addition to the quality of our hotels and the diversification of our portfolio across a variety of highly attractive lodging markets, we continue to believe that our affiliation with some of the strongest brands in the industry is a competitive advantage for our company. We have aligned ourselves with top lodging brand companies such as Marriott and Hyatt, which offers strong revenue-generation channels and loyalty programs that could prove to be particularly valuable during times of slowing demand.

We believe our portfolio is generally well positioned following our significant capital expenditures in 2017 and 2018, and we continue to see positive results as these hotels and resorts gain market share against their competitive sets. On a year-to-date basis, we have been able to increase our portfolio's market share by over 300 basis points, a result that reflects both renovation improvements at our newly refreshed assets as well as successful revenue strategies implemented by our operating teams throughout the portfolio.

We continue to look for ways to unlock additional value across our portfolio and believe our portfolio continues to provide opportunities for targeted ROI projects.

Regarding our most significant capital improvement projects, we are looking forward to reaping the benefits from our soon-to-be-completed new ballroom at Hyatt Regency Grand Cypress, particularly after we complete the renovation of the existing meeting space in 2020. We also remain excited about the revenue growth opportunities after the transformational renovation of Park Hyatt Aviara. This project is progressing very well, as Barry will describe in detail shortly.

Additionally, our significant acquisition activity over the past several years continues to afford opportunities for growth as we integrate the properties into our asset management platform. Ultimately, all of these factors have played in our favor in the current lodging environment, and we believe have positioned us well for future growth.

Now turning to the topic of potential future transactions. As you know, we have a history of being active on the transaction front. As such, we are continually evaluating potential acquisitions and dispositions that could further improve the overall quality and growth profile of our portfolio and create long-term shareholder value. Finding appropriate acquisition targets and executing transactions require a significant effort and dedication. We have a track record and expertise that is second to none in our industry, and we remain hopeful that we will be able to acquire assets in the quarters ahead that have unique investment characteristics and growth potential. However, we will remain disciplined in the execution of our investment strategy as we attempt to identify appealing acquisition opportunities in today's competitive transaction market.

As it relates to dispositions, the majority of our sales in recent years have involved properties with significant near-term capital requirements where we did not project an appropriate return on this additional investment. We have also sold properties that we did not view as long-term strategic assets based on either property locations or the quality levels of these assets. While we have significantly improved our portfolio over these past several years, a few properties that fit a similar profile could be one source of disposition activity for us in the future. We also believe that opportunities may exist to take advantage of disparities in public and private market valuations of high-quality lodging assets, and this could be an additional avenue we may selectively pursue on the disposition side. However, we will continue to exhibit discipline as we evaluate all of our potential capital allocation decisions.

We also remain cognizant of the significant time and efforts that are required to build a portfolio of the scope and quality as ours. We continue to believe strongly in the long-term growth prospects for our company and believe we have tailored our portfolio to be able to outperform during times of reduced industry demand as well as in a more robust growth environment.

Barry will now discuss our portfolio of third quarter performance in more detail and provide an update on our capital expenditure activities.

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [4]

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Thank you, Marcel. As a reminder, all of the portfolio information I'll be speaking about is reported on a same-property basis for the 40 hotels owned at quarter end. As Marcel mentioned, our third quarter results were in line with our overall expectations for the quarter. Same-property RevPAR was up 2.5% for the quarter with both occupancy and ADR increasing 140 basis points and 0.6%, respectively. Group revenue was up approximately 1.8% compared to last year while transient and contract business was up approximately 2.7%. Overall, weekdays were quite a bit stronger than weekends, particularly in September as a result of the disruption we experienced over Labor Day weekend.

Despite the current lodging backdrop, we continue to see strength across many of the markets in our portfolio. Looking at RevPAR growth in our top 10 EBITDA contributing markets: Dallas was up 15.2%; Phoenix, up 8.2%; Houston, up 6.5%; and Orlando, up 6.3%. Dallas benefited year-over-year from the renovation of the Marriott Dallas Downtown during the third quarter last year, and we have strong in-house group at Fairmont Dallas. In the Phoenix market, both Hyatt Regency Scottsdale and Royal Palms saw strength in transient business, with production up at both properties as a result of successful marketing promotions as we work with the hotels to refine top line strategies during our second summer of ownership.

Our Houston performance was attributable to strength in our Western properties in the Galleria, which have been gaining significant market share as a solid group base has enabled the team to yield higher transient rates since the comprehensive renovation of these properties. We also saw outperformance in our Orlando properties, particularly relative to the overall market, which is actually down in RevPAR for the quarter. Hyatt Regency Grand Cypress, which benefited from the lapping of the guest room renovation last year, and Grand Bohemian Orlando each showed strength in July and August, which more than offset the Hurricane Dorian-related challenges and anticipated softer group bookings in September.

Our 2 hotels in Boston were collectively up 5.3% in the quarter despite an increasing supply in the market. Residence Inn Cambridge led the way with strong corporate demand throughout the quarter, while Hotel Commonwealth hosted several quality groups, which helped to overcome the impact of a lackluster Red Sox season compared to last year.

Our Napa hotels also saw RevPAR growth, up 3.7%, driven primarily by Marriott Napa Valley, which benefited from a strong group base in August. In the San Francisco area, our hotel at San Francisco Airport grew RevPAR 2.3% despite weak citywide compression. This hotel continues to benefit from unique demand channels specific to its submarket, leaving it less dependent on compression from downtown. The worst performing of our top 10 markets were Santa Clara, down 4.9%; San Diego, down 1.3%; and Atlanta, slightly down at negative 0.4%. Our Hyatt Regency Santa Clara struggled from a combination of new supply in the market including new select service Hyatt product as well as a slowdown in demand due in part to modest disruption from the comprehensive lobby and first floor renovation. Decreased convention activity in the San Diego market resulted in significant competition for transient business, particularly at Andaz San Diego, which suffered from weaker-than-expected ADR performance.

In Atlanta, strength at Renaissance Atlanta Waverly was offset by softer-than-expected performance at the Waldorf Astoria Atlanta Buckhead as the hotel continues to struggle following its transition from Mandarin Oriental. We continue to work with the hotel and Hilton to ensure the right strategies are in place for the hotel going forward.

Outside of our top 10 markets, other top performing markets include Birmingham, where the Grand Bohemian Mountain Brook was up 10.5%; Austin, up 10.2%; and Charleston, South Carolina, up 9%. While we experienced strength in the third quarter on the room side, food and beverage revenue was down 1% due to less banquet and catering business as a result of softer group business largely in September as well as several restaurants that were undergoing renovations during the quarter. Other revenue, however, grew 5.1% as a result of increases in resort and destination amenity fees and cancellation and attrition income.

As Marcel discussed, we continue to be pleased with our margin performance in the third quarter and year-to-date. As is the case last quarter, rooms margin was a highlight, with rooms expense actually down 0.5% as our operators continue to be extremely diligent in controlling expenses at our hotels. Food and beverage operating margins were also strong despite the decline in food and beverage revenue for the quarter. Undistributed expenses were not as well-controlled and were up 4% as A&G, sales and marketing and repairs and maintenance grew at higher rates due to seasonal costs.

Moving to our renovations and capital projects during the quarter. We spent approximately $26 million in the third quarter on CapEx, bringing our total to $63 million as of September 30. During the quarter, we completed several projects including renovations of the casinos and suites at Hyatt Regency Scottsdale; the renovation of the Alvadora Spa at Royal Palms; the renovation of Daily Grill, the restaurant at Westin Galleria Houston; the final phase of the meeting space renovation at Marriott Woodlands; as well as the renovation of the restaurant and creation of a new Regency Club as part of the complete renovation of the lobby level at Hyatt Regency Santa Clara.

Looking to Hyatt Regency Grand Cypress, we continue to be excited about all the progress at the resort and looking forward to reaping the benefits of the capital spend at the property since our acquisition. During the quarter, we completed the renovation of Hemingway's, the resort's signature restaurant. We are nearing completion on our biggest capital project of the year, the construction of the new 25,000 square-foot ballroom along with pre-function and ancillary space at the resort. We anticipate completion of the new facility by the end of November, with the first group booked in early December.

At this point, group pace is up nearly 30% for 2020, reflecting the hotel's ability to book this new space even prior to its completion and the strong reception of this facility by the meeting planner community. We look forward to renovating the existing meeting space at the hotel in the summer of 2020.

The planning, budgeting and design for Park Hyatt Aviara continued during the quarter. We are on track to begin both the guest room and meeting space renovations in mid-November, with the remainder of the project including public spaces, food and beverage outlets, spa, pool areas, landscaping in the golf course to begin in stages throughout the fourth quarter of 2019 and the first quarter of 2020. As a reminder, the complete renovation of the resort and the property grounds is expected to cost between $50 million and $60 million. We are confident this investment will create a completely transformed resort that will appeal to a wide variety of group and leisure guests.

While Park Hyatt Aviara will certainly be our largest capital project in 2020, we also look forward to starting a few smaller yet important projects in Q4 2019 that will conclude in the first quarter of 2020, specifically meeting space renovations at Ritz Carlton, Pentagon City, Westin Oaks, Fairmont Dallas and Andaz Savannah. In the summer of 2020, we'll be transforming the Waldorf Astoria Atlanta Buckhead restaurant over the summer and executing a significant guestroom renovation at Marriott Woodlands as well.

And now I will turn the call over to Atish.

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Atish D. Shah, Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer [5]

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Thanks, Barry. I'll discuss 2 topics this afternoon. First, I'll discuss our balance sheet and then I will turn to our outlook.

Our balance sheet continues to be strong. Our debt has a weighted average term to maturity of just over 4 years. Our debt maturities over the next 2 years are quite manageable. We have $190 million of debt maturing and that includes an unsecured term loan and 1 small mortgage loan. Approximately 80% of our debt is fixed rate debt based on origination or hedging, and 20% is variable rate debt. We have a good mix of secured and unsecured debt as well, and overall, 31 of our 40 properties are unencumbered of property level debt. This provides us significant flexibility.

Our net debt-to-adjusted EBITDA ratio was 3.4x at the end of the third quarter. As a reminder, since our listing in 2015, our leverage ratio has ranged from the low 3x range to the low 4x range. At quarter end, our weighted average interest rate was 3.74%. As to liquidity, at the end of the third quarter, we had approximately $115 million in unrestricted cash. In addition to that, we have an undrawn $500 million credit facility.

During the third quarter, we completed 1 debt modification. We lowered the borrowing cost on our $125 million unsecured term loan that matures in September of 2024. With the reduction in pricing, the current annual interest rate on that loan is 3.27%.

Now turning to our outlook for the full year. Our guidance is largely the same as it was a quarter ago. You'll note that we have narrowed the ranges, consistent with our approach at this time in prior years. We currently anticipate same-property full year RevPAR to be up between 1.5% and 2%. We now expect 2019 adjusted EBITDAre to be between $295 million and $301 million. Again, the midpoint is the same compared to prior guidance. While our overall 2019 adjusted EBITDAre forecast hasn't changed, the guidance includes a few items worthy of a call out as follows: First, we outperformed our expectations by $1 million in the third quarter; second, we expect G&A expense to be approximately $1 million lower than our prior estimate due to a lower bonus accrual and some open positions; third, our guidance reflects us booking by year-end a $2 million property tax settlement for several years of appeals for a property that we have sold.

Offsetting these 3 items is our forecast for hotel EBITDA for the fourth quarter. Relative to our prior guidance, we expect lower non-rooms revenue and more margin decline. We are hopeful that our results actualize better than this but are basing our guidance on recent trends.

So net-net, no change to adjusted EBITDAre guidance for the full year.

Turning to adjusted FFO. We expect to earn between $243 million and $249 million. On a per share basis, this reflects $2.12 to $2.18 of adjusted FFO per share. This is based on a full year count of 114.4 million shares or units, which is unchanged from last quarter. Also unchanged are our forecast for interest expense and income tax expense.

As to our outlook for 2020, we are early in the process of reviewing initial hotel operating budgets. One data point is our overall group revenue pace, which is up 3.5%. That increase is driven by Hyatt Regency Grand Cypress. Excluding Hyatt Regency Grand Cypress, our overall group revenue pace is approximately flat. As a reminder, our group mix is about 35% of our overall mix. And as of the end of the third quarter, half of our 2020 group revenue was definite.

In conclusion, we are pleased with our performance in the third quarter and year-to-date. We have tracked at/or above our internal expectations over the last several quarters. As we look ahead, we expect the next several months to be more challenging from both the demand and margin perspective. Overall, we continue to believe the company is well positioned for the future in terms of internal growth opportunities, the strength of the balance sheet and the capabilities of the team.

That concludes our prepared remarks. At this time, Andrew, will take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from David Katz of Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [2]

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So I appreciate all the commentary and I just really wanted to go back to the comments made about the environment or the economy slowing, and we obviously get to see RevPAR. But if you could elaborate just a bit on what you're looking at, or what kinds of things you're seeing out there that shape your view about what the landscape looks like in the next 12 months.

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [3]

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Well, I think, in general, David, I mean obviously, we're looking at a lot of the same kind of economic indicators that you're seeing out there. And what we're really seeing throughout the portfolio, frankly, is it's really a story of 40 different assets and a large number of different markets within our portfolio that don't necessarily all behave homogeneously from week-to-week and month-to-month. So what we saw in the last quarter and what we focused on in our comments and in our release this morning is that we had some softness and particularly in September related to the group demand, but we were actually quite pleased with the way the transient came in during the quarter and backfilled some of that shortfall.

So I know that's -- you've heard from maybe some others sometimes about maybe a little bit more concerned about the transient piece. But when you just look back on the 1 quarter we just had, we actually were quite pleased with the transient demand that came in.

The one thing that we were always concerned about coming into the year was really kind of a shortfall on the group side in the months of September and October. And even though we've been able to backfill some of that and actually have seen some growth in pace towards the end of the year, it was something that was hard to fill in and was a little bit more surprising in September, frankly, because in October, there was also an expectation that the timing of the Jewish holidays was going to put some pressure on that. And unfortunately, September didn't quite make up for that and as you saw in the results kind of throughout the industry.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [4]

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And then one other question, if I may. I know that the consolidation, particularly around Marriott, has been, I guess, I'd call it a less than straight path. Is that path starting to straighten out? And we have also seen some consolidation that's gone on, on the management company side, which is a bit less public. But it -- are there any dynamics worth discussing around that side of the business where they can either help or show up in how your operating performance turns out?

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [5]

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David, yes. I think so. Certainly, we're starting to see and I think we credit some of the transient infill we've had this year to the strength of Marriott's program, Marriott representing half of our rooms in the portfolio. And certainly, we think that they are attracting a loyal guest that is utilizing their properties more, including ours specifically. Although as we've talked about before, we had some pretty intentional strategies around making sure that our Marriott properties are the best properties within their given markets and we think we've attracted more business from legacy SPG guests than we've lost to legacy SPG hotels. I think that's one. Two, we're certainly seeing some benefit this year from some of the program service fees and other shifts in cost that Marriott has put in place, and I think that is reflected in a portion of what we've been able to do as a company in terms of maintaining and in some cases, in other quarters, improving margin.

As it relates to the third-party managers, we have a relatively small stable of third-party managers that we've worked with for a long time and are not -- have not yet been impacted really at all by any of the consolidation in the third-party managers space.

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Operator [6]

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The next question comes from Austin Wurschmidt of KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [7]

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Marcel, I wanted to touch on your comments on dispositions. Specifically, you mentioned that you were looking at opportunities to capitalize on the disparity between public and private market valuations, which was a little bit of a pivot or maybe just incremental to your prior comments surrounding sales. And I'm sure we all saw the news as it relates to kind of the Kimpton portfolio, but I was really hoping that you could tell us how you weigh the different disposition buckets, the lower ROI moving forward versus non-core and then just opportunistic in kind of the current fundamental backdrop.

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [8]

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Sure. Well, Austin, as I'm sure you know and as I'm sure you've heard from us before, it's really our custom that we really only talk about transactions that have occurred and that are -- transactions that are actual as opposed to either that we may or may not be working on. So I'll just globally talk a little bit about our view of dispositions as I also did in some of my prepared comments, which is the majority of what you've seen from us has more fit into that one bucket, which has been selling assets that we really don't think are great strategic fit for us long term and, in many cases, also have very significant CapEx needs in the short-term that just make it a type of investment that we don't feel is appropriate for us to make. Doesn't mean that we also haven't looked in the past and we'll continue to look at potential opportunities to potentially sell an asset if we feel that it is a good value-creation tool for us and creates good long-term shareholder value for us.

So I wouldn't say that, that's any kind of pivot from the way that we're looking at the portfolio. But to the extent we would have some dispositions that fall into that bucket, it would truly be driven by the fact that we think that there's more value to be harvested potentially from an asset than owning those assets longer term.

But we are very much cognizant of, and I mentioned this in my prepared remarks, too, of the fact that it's hard to build the type of portfolio that we own. We own a really high-quality portfolio, doing transactions is not as easy and straightforward as you may think sometimes. So it is something that we're very cognizant of, and we believe strongly that we have a great portfolio that we build over time that has some really good long-term growth prospects in it.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [9]

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Appreciate the thoughts there. And you also characterized demand softness as being limited to pockets of demand. I was just wondering if you could put a little bit of a finer point on that, if that relates specifically to business mix and what you've seen in terms of kind of some group softness here in the near term versus transient or if it's more market-specific.

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [10]

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It gets back a little bit to my answer to the earlier question, which is it's really hard to paint some stuff with a very broad brush in the current environment. We see markets where group demand has been very healthy. We see markets where corporate transient demand has been very healthy. There is those different dynamics at play in different market sometimes. So that's why I wouldn't say that we're seeing kind of an overall softness in any particular category because as I mentioned earlier, particularly when we look at September, we were very pleased with our production on the transient side to offset some of that weakness on the group side.

So it's -- that's why I'm really referring to kind of some softness in some pockets of demand, more so than there is anything really specific as it relates to one segment.

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Operator [11]

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The next question comes from Aryeh Klein of BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [12]

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Just following up on the last question. You alluded to the stronger transient demand performance in the quarter. Can you maybe talk a little bit about how that's performed in the -- so far this quarter? And then maybe you can elaborate a little bit on some of the challenges you're seeing at the Waldorf in Atlanta and what's going on there.

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Atish D. Shah, Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer [13]

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Yes. Aryeh, it's Atish. Thanks for the question. So as for the first question, we don't really have full data on transient for this month. We will say -- I will say that October RevPAR is -- we expect it to be down approximately 3.5%. And the other piece I'll mention with regard to transient is if you look at our transient pace, it's actually positive for the next 90 days. And while group pace is negative, it's less negative than it was 90 days ago. So those are both positive indicators relative to 90 days ago. The one area, and this does tie back to some of the prior questions, is the non-rooms or the F&B spend, which does have a pretty big impact in our portfolio given the mix of group business that we have. And it has a pretty big impact on margins. So those are the things that we really kind of pointed towards in the prepared comments as affecting our outlook. Clearly, it's not RevPAR because our RevPAR guidance didn't change. But it's more that non-rooms revenue and its impact on margin that's led to our view that fourth quarter is expected to be weaker by several million dollars relative to what we thought a quarter ago. And then, Barry, perhaps you could talk a little bit about Buckhead?

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [14]

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Yes. Sure. So at the Waldorf Astoria Atlanta Buckhead, it's really just about a slower transition and ramp-up than what we had expected. I think with -- some of the highest-end Mandarin customer is not currently staying at the hotel, they left for other competitors that were -- that are more recently renovated. And Hilton has been slower in filling -- backfilling that with the anticipated very high-end corporate group business that we thought would take its place, not surprising it would have taken -- that would take a year for that to ramp up and we're just now approaching the 11-month mark in our ownership of the asset. So not particularly surprised. And I think -- and those are really the 2 issues and we're working hard on them with the management team there every day. We still have a lot of confidence in the Waldorf brand and we have a lot of confidence in the physical facility itself and certainly think we will make that property move in the direction we always thought we would. It's just been taking a little longer than I think we and Hilton anticipated.

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Operator [15]

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The next question comes from Michael Bellisario of Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [16]

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Atish, just one for you on the guidance. Is it correct that you have a $4 million implied change in the fourth quarter. Is that the right math?

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Atish D. Shah, Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer [17]

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That is the right math. You're breaking up a little bit. So I couldn't fully hear that question, but if it's -- if the question is, is it $4 million implied change in the fourth quarter, that is the number.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [18]

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Okay. And then just back to the opportunistic dispositions and that comment you made, Marcel, can you maybe help us quantify how wide do you think that spread is today between the public and private market valuations that you referenced?

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [19]

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Well, I'd hate to put any kind of fine point on that, frankly. I think that's -- we're probably not the only people where you've heard this from that we do believe that there's a disparity to some extent between private market valuations versus public market valuations, particularly when it comes to assets that have a lot of good growth or good quality characteristics related to it. So as I said before, if and when there are transactions for us to discuss, then we will obviously do so.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [20]

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And then just how much of your motivation here on the opportunistic front is really because you're seeing more opportunities on the buy side versus last quarter? I didn't catch you say the pipeline was -- like you said in the last couple of quarters or so...

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [21]

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Well, in general, I'd say that the pipeline hasn't changed that much. It might have improved a little bit just from the potential number of transactions that are out there. It's still a little early to say whether the spreads in the bid/ask between buyers and sellers, whether that's compressed a little bit. I would say that there's probably a few more opportunities that we're seeing in the pipeline, but I wouldn't say that there is a real sea change there.

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Operator [22]

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The next question comes from Thomas Allen of Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [23]

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So in the fourth quarter, are you feeling any impacts from the California wildfires?

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [24]

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Thus far, we've seen no impact. We've had a couple of properties that have lost power for a couple of hours. And in the current environment where the fires are, particularly as it relates to our Napa assets, we're actually the beneficiaries of some, albeit low rated, displaced business of -- and relocation of residents from Sonoma, but nothing material.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [25]

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Okay. So nothing material to call out for the quarter?

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [26]

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No. Not at this point.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [27]

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Okay. And then just as we kind of -- as I did a quick math, it kind of implies fourth quarter RevPAR guided down 2 to flat. It's -- I'm not sure it's a simple average. Is that a fair comment? And is there a way to kind of bifurcate some of the different pieces that are affecting it like the holiday shift and anything else to call out?

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Atish D. Shah, Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer [28]

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Yes. I mean that number is right, down 2 to flat. As to bifurcating it beyond that, I'm not sure that we can do that. I would say that's -- that reflects all of the various factors combined.

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [29]

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Including what I mentioned before, the fact that, obviously, October is more challenged because of the timing of the Jewish holidays, and Atish obviously referred to that as well when he spoke about kind of the preliminary estimate of where we think October will come in.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [30]

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I think one of your periods had the Jewish holiday shift, I think it was 50 basis point impact on the fourth quarter. Is that a fair estimate, do you think?

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [31]

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Really hard to say. I don't think we have a real fine estimate on that right now. But certainly, it was impactful on the group side as expected and that's what caused the hole in October group bookings that we knew was going to be existing.

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Operator [32]

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The next question comes from Bryan Maher of B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [33]

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Marcel, can we drill down a little bit more on your potential acquisitions? It sounded like your tone might lead one to believe that there's something in the offing maybe in a few months. And I guess, hypothetically, and you may consider dispositions, whether it's Kimpton or other things, does it rely in your hand upon wanting to do a disposition in order to fund an acquisition in a capital recycle or you have so much availability that it's purely a price/opportunity acquisition?

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [34]

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Well, once again, I mean, obviously, to the extent that there's anything real to talk about, we would happily do so. But in this instance, I will tell you that in general, as you know, our philosophy has always been that transactions -- doing transactions is a strength of this company and we've been very comfortable doing both acquisitions and dispositions in various parts of the cycle. Our strategy has not been to necessarily build up a big war chest for the time when potentially there could be a lot of great opportunities out there because you just have -- it's hard to necessarily forecast that will absolutely happen.

So in our minds, what we're always focused on is how do we create a portfolio that has a better growth profile going forward, how do we create a portfolio that has an overall better quality level that is able to withstand also potential downturns that may or may not be upcoming.

So from that perspective, we're always looking and we're always looking at building a pipeline of potential actionable acquisition opportunities. So I wouldn't say that any of that has necessarily changed over the last few months. And as we look at overall capital allocation, we're obviously looking at all the tools that we have available.

Atish mentioned the strength of our balance sheet and he mentioned the fact that we have cash on the balance sheet. We have a fully undrawn $500 million line of credit. So I wouldn't -- I really wouldn't be necessarily tying anything together on the acquisition or disposition side that is really being proactive potentially on both sides to the extent that we find opportunities to create shareholder value.

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Atish D. Shah, Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer [35]

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Yes, I would just add, generally, our view is -- and you've seen this in our behavior, I mean we've bought and we've sold. We're in -- these are difficult things to match fund. So we're trying to be active on both sides to create value and to move the portfolio. And the deals, whether it's acquisitions or dispositions, need to stand on their own in terms of the value we believe we can generate, not weighted necessarily one to another.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [36]

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Okay. And then maybe a question for Barry or Atish. On labor costs, are you seeing any moderation on the pressures that most lodging companies have seen over the past 2 years?

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [37]

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We are definitely not seeing any moderation and certainly although we've been able to maintain our total payroll and benefits at about 2% growth year-to-date, I think it's fair to expect that, that will not be reduced and would likely increase in 2020.

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Operator [38]

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The next question comes from Bill Crow of Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [39]

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Marcel, let me question you on the acquisition front because it seems like we've seen no change in cap rates or acquisition yield, but the risk seems to have gone up a little bit based on the economic outlook. So why are we not at a point where the uncertainties outweigh the opportunity at least on a short-term basis, or at least until cap rates were to move to kind of offset that?

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [40]

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Well, it's a good question, Bill, in general. I think, again, it's one of these things where it's kind of hard to talk about in abstracts and hard to talk too general about what's out there in the landscape. I think, to your point, you've seen some transactions happening recently that have been still pretty robust multiples and pretty low cap rates. So there clearly is a view in those type of transactions that the long-term benefits and long-term upside in some of those transactions are outweighing maybe a shorter-term risk that exists in those potential transactions. So to the extent that we would be and then the way that we're underwriting deals is, obviously, we're looking at both. We're looking at short-term risk and we're also looking at what is an asset going to do longer term and what kind of value can it drive for you in the portfolio.

I think that it's probably a little too early to say, are we seeing an impact on cap rates or will we start seeing an impact on cap rates from maybe a little bit more uncertainty that's in the market. I think, in general, there has been a fair amount of uncertainty in the market and I think there still has been enough capital that has been -- has remained interested in transactions to still create a pretty robust transaction market out there. And we've talked about this before. I mean, overall, the financing market remains very robust. So you're not seeing a lot of sellers that feel like they need to just sell and really start driving up cap rates as a result of that because there is that alternative of just being able to finance assets very, very attractively at very low rates and at pretty good proceeds.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [41]

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All right. Barry, on the Waldorf in Buckhead, was there -- remind me if there was any performance guarantee or key money or anything that helped -- provided help you get through this transition period?

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Barry A. N. Bloom, Xenia Hotels & Resorts, Inc. - President & COO [42]

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We did not disclose anything in that regard nor we have really at any of our historic transactions. But our interest with them are very clearly aligned to try to drive performance in the asset. But there is no income guarantee in place at that property.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [43]

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All right. And then lastly, Atish, you mentioned that 50% of 2020 group business was definite. How does that compare to a year ago or 2 years ago? What's -- where should you be at this point in the year?

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Atish D. Shah, Xenia Hotels & Resorts, Inc. - Executive VP, CFO & Treasurer [44]

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Yes. It's about the same, Bill. It's generally consistent, and that's where we should be. That's where we think is appropriate. We'll still book in quite a bit of business between now and year-end. So we'll start the year with close to 2/3 of our group business on the books. So from that perspective, we're tracking well. Now again, it's 35% of the business overall that's group, so there's obviously a lot of uncertainty in the remainder of the business. But at least from where we sit today, we are able to book in roughly at similar levels versus the last year or 2.

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Operator [45]

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The next question comes from Dori Kesten of Wells Fargo.

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Dori Lynn Kesten, Wells Fargo Securities, LLC, Research Division - Associate Analyst [46]

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When you guys think of renovations in 2019 and 2020, would you expect them to service a net headwind or a tailwind for RevPAR next year?

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [47]

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Well, this year, obviously, our renovation impact will be significantly below where we were last year, and we've talked about last year being closer to about 100 basis points and this year being at about 20 basis points. We don't have a large number of projects that are upcoming next year, but we do have the very significant renovation that we're doing at Aviara that you're well aware of. And then we have a room renovation scheduled at Marriott Woodlands and a couple of the other things that Barry have spoken about.

So it's a little early to put a real number to that. We're really in the early process, as Atish referred to, of reviewing budgets. We're trying to, as we always do, limit the disruption as much as possible. Clearly, Aviara is a property where we will see a good amount of disruption. But on the other hand, it's also performing obviously at a level where we think there's very significant growth that should be coming out of it after we do some of these renovations.

So a little early to put a real number to it, Dori. But probably a little bit greater than where we are this year and clearly something we'll talk about in the next quarter.

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Operator [48]

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This concludes our question-and-answer session. I would like to turn the conference back over to Marcel Verbaas for any closing remarks.

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Marcel Verbaas, Xenia Hotels & Resorts, Inc. - Chairman of the Board & CEO [49]

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Thanks, Andrew. Thanks, everyone, for joining us today, especially on a Halloween afternoon. I hope everyone has a great evening tonight and doesn't get spooked out too much by what you'll hear on any calls over the next few weeks. And we also look forward to seeing most of you at the NAREIT Conference here in about 10 days. So thanks again, and we'll speak to everyone certainly next quarter.

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Operator [50]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.