Condor Hospitality Trust, Inc.
Q4 2017 Earnings Call Transcript

Published: 20 Mar 2018

[Operator:]

Good morning, and welcome to the Condor Hospitality Trust conference call to review the Company's results for the fourth quarter and full year 2017, and its outlook for 2018. On the call this morning will be Bill Blackham, President and Chief Executive Officer, and Jonathan Gantt, Chief Financial Officer. Before Management begins, I would like to remind you that this call may include forward-looking statements concerning the Company’s operations and financial condition, including markets and industry trends, the Company’s forecasted operating results, the Company’s business and investment strategy, the Company’s projected capital expenditures, and the Company’s ability to obtain capital. Such statements are subject to various risks and uncertainties. Actual results could materially differ from results anticipated due to a number of factors, which are identified in the Company’s SEC reports, including the Company’s 10-K filed yesterday evening. The Company assumes no obligation to update or supplement forward-looking statements that may become untrue because of subsequent events. During this call, the Company will also discuss non-GAAP financial measures such as, FFO, adjusted FFO, hotel EBITDA, EBITDA and Adjusted EBITDA. Management’s view of the usefulness and risks of these non-GAAP measures and applicable reconciliations to GAAP measures can be found in both the Company’s earnings release and the Company’s 10-K, both filed yesterday evening. I will now turn the call over to management. Bill?

[William Blackham:]

Thank you. Good morning and welcome to Condor Hospitality's fourth quarter 2017 earnings conference call. On our call today, we will discuss both our fourth quarter 2017 and calendar year 2017 operational performance, our acquisitions and dispositions activity and a result achieved in executing our strategy. Jonathan will review our financial results, balance sheet and outlook. We are extremely pleased with our operational and inquisitive performance and accomplishment in both the fourth quarter of 2017 as well as for the entire year. During the year, we successful continued pursuing our strategy and essentially completed the transformation of Condor now positioned with a strong platform poised for growth. We have a high-quality portfolio of assets that is delivering outperformance with regards to both RevPAR and EBITDA margins thereby affirming key elements of our investment strategy. In the fourth quarter, our new investment platform hotels on a same store basis delivered RevPAR growth of 2.5%. For the full year 2017, the same store RevPAR growth for our new investment platform hotels was 5%. Our 5% RevPAR growth for the year substantially exceeds industry wide RevPAR growth of 3% and is well ahead of the RevPAR growth achieved by our direct public REIT group. Our 5% growth was driven by gains in both occupancy and ADR, occupancy increased 3.1% year-over-year and ADR increased 1.8% year-over-year. As you were aware, we have a differentiated investment strategy that is requiring young, high quality hotels in the top 100 MSAs with a particular focus on MSAs 20 to 60, although with exceptions for compelling opportunities. This differentiated strategy was responsible for the outperformance in 2017 and our expectation is the same for 2018. We’ve realized positive RevPAR growth broadly across our hotels and markets. In fact, many of our hotels had single digit and double-digit RevPAR growth for the year. The positive results continue to indicate that this differentiated strategy is timely from the perspective of markets and hotels performance at this stage of the lodging cycle. We are highly confident that our differentiated investment approach should continue in the near-term to deliver RevPAR outperformance. Our strong RevPAR performance combined with asset management resulting in achieving margin expansion. During the fourth quarter, we increased same store EBITDA margins for our new investment platform hotels to 37% representing an expansion of 340 basis points over the last year’s quarter. Same store hotel EBITDA margins for our aggregate new investment platform hotels increased year-to-year by 50 basis points over the same margin in 2016. We continue to take an intensely active approach to asset management and Jeff Dougan, our Chief Operating Officer continues to work closely with our third-party managers, particularly in the discipline of revenue management in order to achieve these positive results. While our hotels already run quite efficiently, we believe they will remain opportunities to realize additional flow through as demonstrated in our 2018 outlook of margins increasing to an estimated range of a 39% to 40% for the new investment platform hotels. Some of these opportunities include optimizing our revenue mix, improving our cost control, displacing [ph] lower rated drive business and beginning to realize benefits from our growing scale. As we look forward to 2018 we expect to continue to see solid operating as outlined in our outlook provided earlier this year, which we’re reiterating today. A supply and demand dynamics in most of our submarkets remain attractive and we have young high-quality hotels that are still ramping and gaining market share, based on January and February results. We remain confident in our 3% to 4.5% RevPAR outlook for the 13 new investment platform hotels owned as of December31 third 2017. During the fourth quarter and subsequent to year-end we advance the portfolio transformation of Condor, we entered into an agreement to purchase the Home2 Suites Summerville/Charleston in South Carolina and subsequent to year-end we completed the acquisition of this hotel and additionally closed on the acquisition of the Towne Place Suites, Austin, North Tech Ridge which have been previously placed under contract in the third quarter of 2017. Additionally, during the fourth quarter, we sold one legacy hotel and to year-end, continued the legacy disposition with the sale of two additional hotels and therefore today we only own three of the 55 hotels as the company owned, when this process began three years ago. Our portfolio is now comprised at 15 high quality select service hotel and attractive high growth market and as I stated earlier, three remaining legacy hotels, two of which are being actively marketed for sale. Since the beginning of 2015, our legacy hotel sales have generated over $150 million in gross proceeds that have been recycled into the new Condor. Over the same period, we’ve closed on the acquisition of 14 high-quality select service hotels for a total purchase price of approximately $277 million. The portfolio transformation is substantially complete and we’ve assembled a high-quality portfolio of select service hotels in attractive markets and that, is the platform on which we intend to grow Condor. The average age of our new investment hotels is just four years and the assets are of an exceptional quality that should enable us to continue to drive outperformance relative to our competitors there [ph]. I’m extremely pleased with the success in transforming the portfolio. We maintain a robust pipeline of opportunities and we remain highly focused on expanding our portfolio with young high-quality select service hotels with premium flags and Attractive secondary market. We will remain extremely disciplined in our acquisition strategy and we remain highly confident in our ability to continue to find attractive accretive acquisitions to add to our portfolio. We remain singularly focused on our mission of delivering attractive total returns to our shareholders. We have assembled high-quality young premium branded portfolio that is currently generating industry-leading RevPAR growth resulting in both, strong cash flow and yields on investment as demonstrated by the approximately 10% hotel EBITDA yield on investment we expect to achieve in 2018 on our recent acquisition. The year 2017 was truly an outstanding year and I would like to again highlight our accomplishment. 180% growth in AFFO per diluted share to $0.98 per share as a result of our portfolio transformation and strong hotel operating outperformance. 5% RevPAR growth for our new investment platform hotels which greatly exceeds the industry average and APRUs. 50 basis points growth in EBITDA margins year-over-year for our new investment platform hotels. The acquisition in 2017 of 7 new investment platform hotels representing $132 million in value with contract signed for two additional hotels totaling $36 million that closed shortly after year-end. So, we sold 8 legacy hotels generating $29 million in gross proceeds and exceeding our target as 7 legacy hotel sales. We closed the $50 million common equity raise enabling us to continue to pursue accretive high-quality acquisitions. We closed the $90 million credit facility that was subsequently upsized to $150 million and we transferred Condor from Nasdaq to being listed on the New York Stock Exchange. These accomplishments have resulted in a strong foundation that is poised to continue to deliver shareholders value and per share value creation. And with that, I will turn the call over to Jonathan Gantt, Condor's Chief Financial Officer.

[Jonathan Gantt:]

Thank you, Bill. Prior to discussing our financial results, I will provide a summary of our portfolio. As of today, our portfolio is comprised to 15 new investment hotels and 3 legacy assets for a total of 18 hotels. These 18 hotels are in 10 states and represent 2215 rooms. As Bill mentioned, Condor delivered strong results for both the fourth quarter 2017 and for the entire 2017 fiscal year. Condor's fourth quarter 2017 revenue excluding revenue from our JV, increased to $15.3 million a 45.9% increase over the same 2016 period. Total fiscal year 2017 revenue excluding revenue from our JV grew to $55.5 million, a 9.5% increase over fiscal year 2016. Importantly, the vast majority of Condor's revenues are now generated by our high-quality select service new investment platform hotels, which contribute over 95% of our 2018 outlook revenue estimates. Fourth quarter net earnings attributable to common shareholders was $1.2 million or $0.10 per basic and diluted share, compared to net earnings of $3.6 million or $4.68 per basic and $0.55 per diluted share for the same 2016 period. In last year's quarter, the company recognized the $7.4 million gain on disposition of assets. Fiscal year net loss attributable to common shareholders with $9.4 million or a negative $1 per basic and diluted share compared to net earnings of $2 million or $2.67 per basic and $0.91 per diluted share for fiscal year 2016. Note that in 2017, the company recognized a 23.1 million gain on disposition of assets. Funds from operations or FFO for the three months ended December 31st 2017 increased to 2.3 million from negative 1.1 million for the same prior year period. The fourth quarter increase in FFO was primarily driven by higher revenue and higher margins from our new investment platform hotels, partially offset by greater interest expense. Funds from operations for fiscal year 2017 declined to 6.3 million from 6.8 million for the same prior year period. Adjusted funds from operations or AFFO for the fourth quarter increased to 3.3 million as compared to negative 1.1 million for the same period in the prior year. The company’s AFFO per diluted share for the fourth quarter was $0.28 as compared to negative $1.20 for the same period of 2016. The increase in AFFO per diluted share for the fourth quarter was primarily caused by growth in the revenue contributed by the growing portfolio of new investment hotels as we continue to benefit from the increased scale of our portfolio. Adjusted funds from operations for fiscal year 2017 grew substantially to 9.8 million from near breakeven for fiscal year 2016. Earnings before interest taxes, depreciation and amortization or EBITDA for the three months ended December 31st 2017 was 5.4 million as compared to 8.2 million for the same period in the prior year, due primarily to a reduction in net gains on a disposition of assets as we approach the end of the legacy hotel sales. EBITDA for fiscal year 2017 was 18.4 million as compared to 36.7 million for fiscal year 2016. Once again, a reduction caused by lower net gains on the disposition of assets in 2017 as we approach the end of legacy hotel sales. Adjusted EBITDA for the three months ended December 31st 2017 increased almost 250% to 4.6 million as compared to 1.3 million for the same period prior year. The increase in adjusted EBITDA was primarily driven by strong topline performance and higher margins from the new investment platform hotels. Adjusted EBITDA for fiscal year 2017 was 16.2 million, a 77% increase over adjusted EBITDA of 9.1 million for fiscal year 2016. This increase was once again driven by the strong operating performance of our new investment platform hotels and the benefit of our increased scale. Same store hotel EBITDA for the new investment platform was 5.1 million for the fourth quarter, a 13% increase from the 4.5 million in the same period prior year. This growth in hotel EBITDA is a direct result of our RevPAR growth of 2.5% and our success driving margin expansion in excess of 300 basis points. Same store hotel EBITDA for the new investment platform for fiscal year 2017 was 21.2 million, a 6.6% increase over fiscal year 2016. This growth in same store hotel EBITDA was once again a direct result of our 5% RevPAR growth and margin expansion in 2017. Turning now to our acquisition and disposition activity. In the first quarter of this year, we closed on the acquisitions of the Towne Place Suites, Austin, North Tech Ridge and a Home2 Suites Summerville/Charleston for a combined purchase consideration of 36.1 million. The acquisitions were financed utilizing availability under our revolving credit facility. During the fourth quarter of 2017, we sold one legacy asset and subsequent to year end we sold an additional two legacy assets. As of today, only three legacy assets remain. As Bill mentioned, one of these remaining legacy assets is currently under contract for sale and the second is currently being marketed for sale. We continue to evaluate alternative to maximize shareholders value for the final legacy assets, [the quality in Solomon Island] In terms of our balance sheet as of December 31, 2017 we had total outstanding long-term debt of 118.9 million associated with assets held for use, with a weighted average maturity of 3.2 years and a weighted average interest rate of 4.5%. In the fourth quarter we refinanced three new investment platform hotels. The effect of this refinancing which would increase the ratio of fixed rate to total debt and to increase the credit facility availability for future acquisitions. The refinance hotels were previously encumbered by floating-rate debt totaling 25 million with a weighted average rate of 4.2% which was refinanced with a 26.5 million mortgage loan with an effective fixed rate of 4.44% and five-year maturity. We were pleased to partner with Wells Fargo for this refinancing. Wells Fargo is a highly respected lender in the industry and their partnering with us further validates the quality of our asset and the attractive of the markets we target. As of quarter ended December 31, 2017 we had cash and restricted cash of 10.3 million and available revolver of 11.9 million. During the fourth quarter, we sold 163,054 shares of common stock under the ATM program at an average price of approximately $10.13. Subsequent to December 31, 2017 we sold an additional 12,334 shares at approximately $10.40. With regards to our common dividend Condor Board of Directors declared a common stock dividend of 19.5 per share related to the fourth quarter 2017. This represents $0.78 per share on an annualize basis and annualize yield of approximately 7.8% based on the closing price of the time of announcement. We continue to maintain highly attractive dividend coverage. Condor's Board of Directors will continue to evaluate the company's dividend policy on a quarterly basis evaluating both the appropriateness and amounts of any future common dividend. Finally, with regard to our outlook, we’re reiterating the guidance we provided earlier this year for the 13 new investment platform hotels owned at that time. We will provide an update on performance relative to this guidance, including the two-additional new investment platform hotels acquired in 2018, when we report first quarter 2018 results. I concur with Bill that I’m pleased with our accomplishments and I'm excited about the future for Condor and our shareholders. We’ve worked diligently over the past two years to execute the repositioning of the portfolio and to enhance the quality of Condor's balance sheet. I'm excited that its strong foundation is now in place to continue to build and deliver shareholder value. And with that Bill and I will be happy to address any specific questions. Moderator?

[Operator:]

[Operator Instructions] Our first question today comes from the line of Jim Lykins with DA Davidson. Please proceed with your question.

[Jim Lykins:]

Good morning everyone and first we talk a little bit more about what’s in the acquisition pipeline right now and any color on how we might want to modeling acquisitions through 2018.

[William Blackham:]

Good morning, Jim. This is Bill. Thanks for joining particularly given the hour on the West Coast. The best response relative to our acquisition pipeline and our expectations for 2018, at this juncture, is to say that our pipeline remains robust. In fact, suitable acquisition candidates that meet our criteria currently exceed the enterprise value of this company. So, the scale of what is in our pipeline has not diminished, it remains at or higher than previous levels. We are evaluating a number of different perspective acquisitions. We have no announcements yet to make. Obviously, we are also evaluating the capital markets and the availability of multiple sources of capital that could be available for us to continue to fuel accretive growth of this company. So, I don't expect much before we pass the end of March to provide further guidance on what our acquisition volume may look like specifically in 2018.

[Jim Lykins:]

Okay. Well, was there something you are looking at right now? Any commentary on what kind of cap rates you're seeing right now. Any changes?

[William Blackham:]

It's a double answer to your question. In some markets and product types and dollar sizes there has been some downward pressure on cap rates i.e. higher purchase prices. In other markets that we're in they have been essentially neutral, no change. And so, it depends on the particular markets. And I think that there is some correlation to scale of the individual acquisition size dollar amount, i.e. more players that hire, there is some correlation to supply and demand balance in a particular submarket. And frankly there is some correlation to age and most recent renovation of the assets. So those three things seem to be playing into what's happening with capitalization rates as it relates to the product. Obviously, there are external factors like interest rates and other things that can be affecting as well. But those are the most common things that I'm hearing in my discussion with sellers.

[Jim Lykins:]

And one last one and I'll hop back in the queue. Can you give us an essential [ph] timing for the disposition that's under contract? And then with the other two, are you still looking to sell Solomon to a developer and then with that other one any color on whether you may or may not sell that over, if so, when you might be looking to sell that one as well?

[William Blackham:]

Sure, I will Jonathan, if I'm incorrect on this, please step up. But we have I believe a previously announced that the Fort Wayne asset is under contract for sale. And we expect that that closing will take place in the second quarter of this year. We're already obviously out almost to the end of the first quarter now. And there is no change in that expectation and so that would them leave to, we are actively marketing the Creston [ph] Hotel and we are not at a point yet where we have a contract but it is being actively marketed and so I would hope in the second quarter that we would have more definitive vision on what is the status of that. With respect to the Solomon’s asset, we have just completed as of last Friday a process that involved engagement of an engineer to evaluate development, entitlements and rights and then furthered on that analysis by causing a meeting to take place with local officials, relative to exploring the potential for entitlement variances to increases the density of development or edge for that parcel. We are expecting to have actually this week a report of most likely scenario, opinion from our consulting firm on that. And then that will cause us to make a decision on what is the most likely valuation and how to proceed with selling that property. With all of that as background, the intention is to cause for the monetization of that asset albeit at a price which substantially exceeds what would be the revenue multiplier valuation of that asset in a traditional sale. From a timing perspective, we are not yet in a position to say when that will occur. Clearly by the time we do our first quarter earnings release we will have definitive date of expected disposition.

[Jim Lykins:]

Okay, I understand that. That sounds like a lot of things that could kind of drag on for a while. Do you think this is something that’s going to be a 2018 event, would you guess that or maybe even drill down second half out, just kind of…?

[William Blackham:]

No in fairness to your question we will not respect obviously to what you’re trying to accomplish with your model as are the other analysts. We would expect that this not drag into 2018 our hope would be that we would cause for this to take place in the second half of 2017.

[Jim Lykins:]

Okay.

[William Blackham:]

I’m sorry 2018. I have to adjust my -- let me go back, 2019 that it would not occur in 2019, our hope would be that it would take place in 2018. I guess my body calendar has not been changed yet.

[Operator:]

Our next question is from the line of Bryan Maher with B. Riley FBR. Please go ahead with your question.

[Bryan Maher:]

Yeah and good morning thanks and much of my questions were just answered by the previous questioning. Between the cash available and the credit facility available, it looks like you got about 22 million of availability, correct me if I’m wrong plus the ability to issue under the ATM. What do you think about your ability to acquire properties with that type of availability? Does it give you comfort for one property with maybe some property levels at or two properties? Do you want to want to push it that far? And can you give us some views into what some of the capital markets activities you’re looking at in a little more detail to finance your acquisitions.

[William Blackham:]

I will start off and then I’ll also obviously have Jonathan enhance what I’m saying but from a starting point take a look at year to date since the beginning of the year. We are blessed that our stock has performed relatively well on a comparative basis to the REIT sector and the hospitality REIT sector. For a lot of different reasons, we’re are not taking credit for that. But it is what it is. And so, from that perspective, obviously whether its ATM or other forms or places that's always something that could be given consideration by management in connection with acquisitions. And as it relates to evaluation of alternatives and the key thing that I wanted to say is obviously there are a myriad of alternatives, both private and public that are potentially available to the company to continue forward with the expansion of the size of the enterprise value of the company through accretive acquisitions. This is not a nonexclusive list just for example, joint ventures on the private side. On the private side as well, transactions that involve sellers taking back shares of stock as part of the consideration. As I said earlier, equity raises and so forth and so on. And so, what we intend to do as you know we have tended to not buying portfolios, but rather acquire mostly on a one-off basis sometimes a couple, the size of what we are buying is small enough, that we can continuously monitor, what is the best path in capital raise for the company at the time that were getting ready to move forward with the acquisition.

[Jonathan Gantt:]

Right I could add just a little color with regard for our availability. Your estimates in our [dry power] [ph] is reasonable, as we know we announced the closing of the McAlpine property yesterday which opened up additional availability on our credit facility, with the near term closing Fort Wayne in [indiscernible] as we market those and money is already under contract, those will be consistent with what we been successful at with regards to purchase price or sales price multiple on a revenue basis. And then of course there is additional value in the quality installments as we advance with that, but your current estimate is reasonable.

[Bryan Maher:]

And I’m sorry I missed this earlier in the call but did you any indication as to how the first quarter was shaping up so far.

[William Blackham:]

No, we didn’t and obviously it's too early but the thing that I will say is that, as we sit here today, we would not be reiterating our outlook for 2018 if we were already in the middle of March and we were seeing things that were materially negative to our expectation. And so, I think that is a very guarded way of saying, we are seeing negative attributes that would lead for us change our outlook for 2018.

[Operator:]

Our next question is from the line of Austin Wurschmidt, KeyBanc Capital Markets.

[Austin Wurschmidt:]

Hi, good morning guys. Bill, just a question. You talked a lot about the legacy hotels and continuing to generate the maximum value creation from those. But are you considering today selling any of the new investment platform hotels?

[William Blackham:]

We constantly, let me take a step back where you saying give me some detail that is valuable for everyone in terms of understanding how this company was managed. We constantly once a month sit down the executive team and go through all of the operations both for the prior month the year-to-date as well as the 90-day rolling forecast going forward in order to do a lot of things ultimately of course to maximize operating income and revenue generating opportunities within each hotel. As part of that exercise we evaluate on a trailing 12-month basis how the hotels are performing with what we believe is a hugely important measure and that is the unleveraged yield on our investment in that hotel. And we compare that against prospective capitalization rates and market dynamics. Obviously, market dynamics were very connected to because we're out in many of the same markets potentially looking for assets to buy. And so, understanding capitalization rates in those markets up and that is just part of our available information. So, our thinking is that to the extent that we elect to not take a look at a prospective selling any of the new investment platform assets. We've essentially just acquired at that price. And we evaluate whether or not we would do so. So with that as the background, the process is unveiling, I will say that on our radar screen we have started to take a look at the possibility of obtaining some BLVs with respect to either one or two of our new investment platform assets due to the fact that the value that can be created i.e. the profit that's recognized is very attractive relative to our purchase price. Number two another reason behind it, one of our stated goals is to keep our portfolio age always fresh and young. And so with growth should we each year -- and this is not a projection but it's an illustration, if we were to buy 7 hotels in a year and sell 2 and the 7 have at an age of 3 years and the two that we sell have an age of 5 or 6 years, then we've kept that average age down and as part of that process kept capital expenditures well managed as well. So that's a lot of information in responding to your question deliberately, because I'm not saying that we're going to, but I am telling you with great detail that we are evaluating.

[Austin Wurschmidt:]

Thanks for that, I appreciate the thoughtful response. I guess clearly the number one priority for you guys is to scale the platform and cost-to-capital certainly matters. But what is your ability and the sensitivity around issuing under the ATM today, with respect to price. And how should we think about the use of that going forward?

[William Blackham:]

Well I think that the ATM we view is not the primary mechanism through which we’re going to raise capital but its rather a supplemental tool one of many that’s available to continue to generate capital at the right time or for specific reasons as we move forward. I would not view that as being something that you know was going to be the major source of liquidity for this company. If we continue to grow the platform, remember with our scale, we have stated that there is very little incremental overhead that is needing to be added to this company, this platform in order for us to grow fairly immaterially i.e. double or more and so with that type of expansion the amount of EBITDA from hotels and AFFO per share after doing whatever capital raises that we do in order to pay for it, brings meaningful growth to the per share EBITDA and the AFFO of this company and so that all of the things being equal should drive share price and then pressure surrounding how we go about building the business should ease. But I think that, that’s why we were very careful in saying two questions ago that we’re evaluating all alternatives and we do it at the point -- we do it without having anything under contract today but in anticipation that we will have assets under contract in the near-term that we have to see what’s the most efficient way given the market conditions at that time.

[Austin Wurschmidt:]

Thanks for the detail, and then maybe just one with respect to the portfolio in the RevPAR guidance for this year, how should we think about you know that range with respect to the market share opportunities as some of these hotels continue to ramp versus just the call it market level growth within the markets that you’re in 2018.

[William Blackham:]

Well I think obviously in the fourth quarter in 2017 I stopped myself for a moment to make sure I didn’t confuse calendar years again but in 2017 which you saw was some continued market share gain by occupancy growth but still ADR growth. Obviously, what we’re now pushing for across the board is higher ADR and for all the obvious reasons the most desirable of those reasons is increased margins and profitability. And so, our push in 2018 is very much a displacement of the existing occupancy, even some decline if we feel is more profitable to the benefit of rate. That is what we’re all about in our asset management in 2018. And so that’s why we’re confident if you take a look at the ranges of our peer group, you know in terms of their outlooks that they’ve provided, you know we’re obviously -- our lower range is higher than just about everybody’s higher range. Now some of that could of course be conservatism built in which I understand but you know our lower range is something that as a management team we would obviously hope that we exceed and we’re striving to well exceed it and stay inside or towards the upper end of the range. That would be our objective. And so, the only way that we’re going to get there given that our new investment platform hotels the outlook that we gave for 2018 was already very high occupancy and so the elevator we’re going get that RevPAR of ADR.

[Operator:]

Next question is from the line of Michael Bellisario with Robert W. Baird.

[Michael Bellisario:]

Just want to go back to your comment in the prepared remarks, you mentioned an opportunity on the expense side on the P&L and how much is that labor and then maybe where the pressure points where you’re seeing on this front.

[William Blackham:]

Sort of the pressure point we’re seeing are not too dissimilar to others, obviously labor is a pressure for everyone in virtually every market. We’re seeing some pressure on cash related items, not only real estate taxes but also rumblings about occupancy tax increase because voters don’t pay for those in the local constituencies and so we’re seeing that up. I can’t give specific yet but in terms of the locations of our portfolio, an expense we don’t expect to have to absorb and reduce with increased revenues is insurance. The location of our portfolio and our loss experience is such that our renewals that are ongoing now were highly optimistic about on that. We’re fortunate also in that we have very little construction and renovation going on in our portfolio. So, we are not being subjected to frankly massive cost increases that are going on with the construction materials across the country. So, I think our cost pressures are there for the most part. In terms of cost reduction interesting enough probably the most varied cost reduction that we are packing with our revenue management initiatives, is the elimination of as much as possible of OTA generated business because not only is the rate lower but the expense is higher, so that’s extremely impactful to our margins. If you look at what our guidance is for our margins for 2018 that we reiterated today. Those are very impressive margins given the pressures that are on everybody for cost containment and so I think that reason for that for the most part explained in the items that I just described.

[Michael Bellisario:]

That’s helpful. Could you provide if you have it, a percentage of you [indiscernible] that are coming via the [indiscernible].

[William Blackham:]

If you want to do it off-line later with Jonathan he can perhaps elaborate on that, we don’t have that information with us here.

[Michael Bellisario:]

Okay that’s fine and then just also on your alternative comments, I know those are just options you listed in may be not necessarily being perused today but may be what need to have or not happen depending on how you’re looking at it, maybe for you to more closely evaluate those options.

[William Blackham:]

I see we now have the luxury that we don't have a signed contract that is essentially causing for a gun to be pointed at our head to make the decision. Obviously, share price in the marketplace combined with near term signing of an LOI for an acquisition or opportunities that provide capital so that we have some breathing room waiting out market conditions. Any one of those could be something that would cause us to ratchet up the decision processing and go to board for authority to move forward. But as we sit today, we don't feel that pressure and that's a good thing. Because obviously the last 45 or 60 days have not been the most attractive times to be in the marketplace at least for equity capital. So, I think that's responsive, Mike.

[Michael Bellisario:]

Yeah. And then last one for me on the supply side. Maybe some areas of smaller market, can you provide maybe a high-level overview of what you're seeing there and how that might impact your RevPAR growth for your newer assets that are still ramping?

[William Blackham:]

Yeah what's interesting, let me first start out because I think this is hugely important. Our assets that we owned at the end of 2017 now you've got to be thinking very carefully what year I'm saying, outperformed our underwriting assumptions. What's interesting about the experience that this company is having, is that our underwriting really drills down to take a look at not only supply that was under construction but pipeline reports of what then come and in those pipeline reports what would be influence our occupancies or rate or not. And we've built that into our projections. And I'm happy to say that for 2017, our actual results exceeded our underwriting. So, I wanted to make that distinction because for 2018, our projections continue to show us exceeding our underwriting. Now with that as the background the marketplace to specifically where obviously there is supply that is affecting the markets Austin, Texas has had two recent large hotel openings in downtown near the Convention Center. And that is affecting the market as well as many of the submarkets. We and Western [ph] Kentucky have absorbed this past year, the opening of a [indiscernible]. But we exceeded our underwriting. So that was expected. In Jacksonville, Florida the Courtyard, a Residence in [indiscernible], that was in our projections and that is pretty well working its way through the system. What's interesting there is that initially the operators of that hotel took a much higher percentage of transient business than you would expect. But they're now shifting their base towards extended stay. And so that’s easing the pressure on our hotel and frankly faster than our underwriting projections had assumed. What's a little bit interesting about our portfolio in '17 and we're looking to see how it affects us in ’18 is that certain markets sporting events as the lack of stellar performance by university teams caused for there to be less demand because there was less attendance at sporting events. For example, University of Kentucky in Lexington, Kentucky, UK’s football team was not stellar this year. The same can be said for Florida State University in Tallahassee, Florida and so our weekend business was less than what we had expected but still in line with our projections which is kind of interesting. And another market place where that occurred which is humorous is in Atlanta because the BCS ended up having as a finalist Georgia and Alabama and those are drive to locations to Atlanta or one night stay over as opposed to two or three. And so, some of that affected us in ’17, so we’ve looked out in to 2018 to see is there events or any other events or circumstances that could affect us. Now none of us know that the UK or FSU should do in 2018 but we’ll see. Those are some of the surprise factors that we experienced.

[Operator:]

The next question is from the line of Tyler Batory with Janney Capital Markets. Please state your question.

[Tyler Batory:]

Thanks, good morning everyone. Just from a strategic perspective, I wanted to ask you a little bit more about the Home2 Suites brands, obviously something that’s unique compared with your peers. Can you just remind us big picture what you think of that brand and I know your appetite to continue to potentially acquire more Home2 Suites hotels going forward?

[William Blackham:]

We since the beginning of Condor have been very bullish on that brand, the best way to describe that is that aside from the fact that it fits squarely within the guest experience that the younger travelers are looking for the millennials in terms of décor and guest attributes and so forth. The really unique thing about the Home2 Suites brand in the right locations is that because it can bridge both transient and extended stay, it has a wonderful ability to capture weekend business and, in some instance, it actually raises the AVR because of the value proposition as opposed to in many brands having to discount or give away the rooms. Obviously, that’s a market-by-market decision based on but it all comes back to the physical location of the asset which is hugely important in the acquisition. But we’re very bullish on it, there is over 200 operational, there is no dilution in terms of how they’re performing across the country. There is several hundred more that are coming and I think that I would very much see us continuing to buy the asset, to buy additional Home2 Suites for that reason, the margins are high, the desirability of the asset is very good. We’re getting great reviews if you go in and take a look at the Trip Advisor ratings on our hotels, they are generally quite good. And so, it's kind of a winning proposition let’s not say that they are another good brand either out there or involving but this one is just really near the top. So, of our pipeline there are several additional Home2 Suites that we’re looking at.

[Operator:]

At this time, I will turn the floor back to Bill Blackham for closing remarks.

[William Blackham:]

We wish to thank everyone for their time and their interest in Condor hospitality and so at this point if there is any follow-on question I would ask that you reach out to Jonathan and he will be happy to have a decision with you. Thank you again.

[Operator:]

Thanks, you everyone. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.