Q1 2020 Earnings Call
[music].
Good day and welcome to the host hotels <unk> resorts first quarter 2020 earnings conference call.
Today's conference is being recorded.
This card Oh, the trouble covert <unk> Vice President of Investor Relations <unk>. Please go ahead.
Thank you and good morning, everyone before we begin please note that many comments made today I consider it before.
It's under federal Securities laws.
I've described no filings with the S. You see these statements are subject to numerous risks and uncertainties caused future results to differ from those expressed and we have not obligated to publicly update or revise these forward looking statements.
In addition on today's call, we will discuss non-GAAP financial information such as a true adjusted EBIT dollar tree Oh, well has held results you can find this information together what reconciliation. It's your most directly comparable GAAP information in todays earnings press release.
8-K filed with the FCC intercept money for natural information on our website, it's here's how dot com.
Speaking on today's call, which me will beat your material crush that's a chief Executive Officer, Brian Mckeon, Laura principal financial controller.
Four of Gauche executive Vice President strategy and mistakes.
Now I'd like to attend the core.
Jim.
Thank you take Hello, and thanks for joining us this morning.
We hope that you and your families are safe and healthy and we extend our deep east for those affected by opened 19.
You know where the lodging sector is navigating unprecedented down that is expected to be at least twice as severe as the great recession.
That's very strong January February U.S., Revpar posted steepest decline on record and is expected to further deteriorate in April according to STR data.
Although we couldn't have anticipated the outbreak of a global pandemic post is well positioned to the withstand the magnitude of its impact due to years, a prudent capital allocation that exercise maximizing balance sheet capacity and liquidity towards the end of the cycle.
Today, we not only expect to persevere through this crisis, we fully expect to emerge a stronger operating model the highest quality portfolio in the company's history and the ability to capitalize on future opportunities to create value for all our stakeholders.
This morning, I will address our liquidity and cash flow.
She business segment trends and our revised capital plan.
Brian will discuss our first quarter performance in Dallas and provide our forecast grateful.
We began this year with a lower leverage in the company's history and 1.65 net debt to adjusted EBITDA No near term debt maturities.
$1.6 billion, a cash on hand, it only unencumbered consolidated portfolio and an investment grade balance sheet.
We drew down our $1 billion right. So what do you agree vulgar ended March and ended April with approximately $2.7 billion, a cash including got Bethany reserves after paying approximately $140 million in first quarter dividends, which were declared in February.
At quarter end, our leverage ratio as defined in our credit facility was at two times. Our interest coverage ratio was at 6.8 times and our fixed charge coverage ratio was at 4.6 times, all of which are well within the limits specified in our credit facility covenants.
We expect to remain in compliance with all our credit facility covenants through the second quarter and are currently in discussions with our supported bank lending group to secure greater flexibility on our covenant requirements.
Moving hardware expenses, we had our operators responded to the precipitous decline in revenues in March and April by implementing portfolio wide cost reduction that are unprecedented in their magnitude.
These include reducing the fixed portion about property allocated costs by as much as two thirds.
Spending power distribution Star Hotel FFT escrow accounts.
Spending most brand standards and unfortunately.
<unk> up to 80% of the hotel workforce.
As of yesterday operations at 35 of our 80 consolidated hotels, representing 43% of our total room count are suspended.
We work with our operators to determine whether to suspend operations at a hotel based on the properties ability to generate revenues that are greater than the incremental costs associated with remaining open.
If the hotel is expected to achieve this incremental threshold it remains open.
Our preference is to lead hotel opened as long as it is financially justifiable to do so.
Because we believe and operational property is better position captured demand when it begins to recover.
Our scale within several markets, such as New York, Washington, D.C., San Diego, Los Angeles, Orange County, and Chicago has helped us generate operational efficiencies and to further benefit from consolidating low levels of demand at multiple properties into the hotel.
Everything operational and that market.
For example, we have gained operational efficiencies in Washington, D.C., We thought leadership of the JW Marriott overseeing the Washington, Mariano Metro Center, and the Westin Georgetown.
The same has been achieved in New York and other markets.
May I consolidation is benefiting our hotels in Los Angeles, San Antonio and San Diego, where we are able to consolidate the man into one property in each of those markets.
For the hotels that remain open our managers had significantly scaled down operation by closing guestroom floors, and meeting spaces, and suspending food and beverage outlet operations.
Due to timing, we expect to see the full benefit of these operating expense reductions in April when total hotel operating expenses are expected to be 70% to 75% lower and our initial forecast from February.
At the corporate level, we expect to further conserve cash by reducing our capital expenditures by 100 $125 million and our corporate expenses by 10% to 15%.
Finally, we expect to I understood spend our second quarter dividend or cut its what penny a share which is the reduction of approximately $140 million compared to our prior 20 cents per share quarterly dividend.
As a result that these anticipated cash savings initiatives.
On a worst case scenario, where all of our hotels are effectively close through the end of 2020 and the dividend remain suspended or reduced our monthly cash outflow would average $120 million to $140 million remark.
Well I think average hotel level expenses up $70 million to $80 million a month as well as estimated capital expenditures interest payments and general corporate overhead.
Importantly, and this worst case scenario.
We would end 2020 with approximately $1.65 billion of cash, including the F. any reserve, leaving us with ample liquidity to support operations as the economy recovers.
Moving on to group and transient business trends.
It's roommate boards, we have lost an estimated $1.3 billion they expected 2020 revenues.
This represents approximately $630 million up total group revenues known to date and $660 million up total transient revenues forecasted for the first half of the year.
Approximately 90% of our total group revenue cancellations have been for the first half of the year.
Over 60% and the second quarter alone.
I would be approximately 10% of total group revenue cancellations in the second half less than 3% are for the fourth quarter.
While the low levels of cancellations for the fourth quarter are encouraging we believed that the near term pace a group and transient business remains uncertain until the consumer pills.
Double traveling again.
Our operators, we booked at approximately 12% of our total 2020 last group revenues with the majority rebooked for the second half of 2020.
Although we expect a significant portion of our total group revenues to be lost due to timing as they were driven by a favorable 2020 citywide convention calendar and majority of our group customers have expressed the desire to be book at our properties.
We have collected $32 million cancellation fees to date with $10 million recognized in the first quarter.
Shifting to 2021, so group revenue pace, we began this year with 2.3 million definite rooms on the books for 2021 and pace was nearly 3% ahead of the same time last year.
Although 2021 group booking activity is how what last year and our total group revenue pace is now flat, we believe group demand returned over time.
With decision makers on the sidelines and weight Cmos, we believe the pace of recovery in both group and business transient will depend upon customers feeling safe to travel.
Markets with stronger group for 2021, our San Antonio San Diego, Seattle, Los Angeles, and Chicago, Whereas New York, Orlando, San Francisco, San Jose Denver, and Boston currently have case opportunities.
Given the current uncertainty paced by market could change considerably in the weeks and months to come.
We continue to believe no long term viability of the group business, while the association business model relies upon generating income from large group meetings, a more intangible reality is that most group meetings allow members within an industry to connect with and learn from each other while building relationships and try.
Just in a manner that we don't think as possible to replicate digitally.
And the long run we believe using group volumes to compress supply and generate productive yield management will remain a cornerstone about lodging business.
That said.
We are positioning ourselves for the recovery to be led by Dr. to leisure destinations as.
As observed in China, and other parts of Asia that are several weeks ahead of the United States.
The recovery, thus far has been like Ben led by domestic leisure space and drive to destinations with renovations recently completed and construction or planned within the next 12 months over 70% of our portfolio and our strongest strive to leisure markets will be fully refreshed.
Specifically, our hotels in Phoenix, San Diego, Orange County, San Antonio and Florida, which represent over 13000 keys or nearly 30% of our total portfolio are very well positioned to capture a recovery and drive to leisure demand.
We continue to prioritize the health and safety of our employees and gas.
Most of our hotels are managed by large brands were known for reliably delivering consistent service and standards. These brands or an outbreak using their cleanliness standards to even higher levels with new protocols to address the current circumstances.
We believe branded hotels communication around an execution, a rigorous lending standards will resonate well with customers.
Moreover, we expect the strength of their loyalty programs to be a strong driver of demand to our properties.
Turning to our supply outlook, while will take several quarters before we had a complete understanding of the change in hotel supply growth.
We've cut our internal net supply expectations for 2020 enhanced based on broad assumptions surrounding project delays or announcements and existing hotel closures.
We now expect supply growth at roughly 1% in 2020.
Average growth over the next three years remaining below our long term historical trend.
Moreover, we believe there is a high probability that several projects that have not yet begun construction will be cancelled or significantly delayed.
Although no one knows the timing or shaped recovery.
We are hopeful that occupancy declines may have stabilized and found a bottom in April.
We are frequently asked what level of occupancy will allow us to break even a hotel EBITDA light.
As you may imagine it's difficult to provide a number as it varies greatly by property requires HDR assumption and it's likely to change on a monthly basis.
We have done the analysis based on the bottom operations and the current environment with significant expense reductions remaining in place.
And that scenario, assuming 80 hours declined 15% to 30% on a year over year basis.
We would expect with deep hotel.
EBITDA breakeven at 35% to 45% portfolio occupancy.
Our enterprise analytics and asset management teams are working closely with our operators to strengthen a long term hotel operating model.
With nearer term goal of achieving breakeven and generating higher profitability at lower levels of occupancy.
And the 2009 recession several operating expense line items were significantly reduced and continue to improve through the cycle.
While we expect our hotels with her new expenses, especially ones related to new clean standards downturns compelled owners and operators to reevaluate brand standards programs and above property expenses.
And exercise that can result in long term savings and I hope you're hotel operating model that better serves customers changing needs.
Turning to Capex, we have reduced our 2020 capital expenditures by 100 $225 million.
Which represents approximately 50% reduction to the portion of the Capex budget that was already spent underway or committed.
Approximately 85% of our Capex savings are derived from eliminating non essential renewal and replacement capex spend with the remainder coming from suspended ROI projects.
We continue to plan on spending $180 million to $200 million on the Mariano transformational capital program and now expect MPC $20 billion, an operating profit guarantees this year.
It makes sense for us to complete these renovations for these reasons first we benefit from $20 million of operating profit guarantees without experiencing commensurate revenue disruption given the current unprecedented low revpar environment.
Second we expect the renovations that position us to achieve meeting for Revpar gains through the cycle, particularly as most hotel owners are compelled to cut back room renovations due to liquidity constraints.
And third construction bids are coming in below budget and market pricing is expected to decline by at least 6% to 10%, which provides us the opportunity to buy out construction at lower prices.
In addition to all this as the performance at these properties return, we will receive enhanced owner's priority on this investment which will reduce the incentive management fees, we pay Marriott.
As part of this year's Marriott transformational capital program, we have completed renovations at the San Antonio reverse any Marriott and where we will finish the Minneapolis City Center Marriott adjusted few weeks later this year, we plan to complete the JW Marriott bucket.
In addition, we expect to start the Ritz Carlton Amelia Island, which is scheduled to complete in the first quarter of 2020 Watt.
Finally, we will complete the second phases at both New York Marriott, Marquis and the Orlando Royal Centre, Marriott, which are scheduled to complete in the third and fourth quarter of 2020 more respectively.
Combined with the properties completed as part of last year's capital program, including Corn Auto Island resort and Spa.
New York Marat downtown.
San Francisco America, Marquee and Santa Clara Marriott, the Marriott transformational capital program will be nearly 70% complete by the end of 2020.
While the program consists of a mix of group and leisure dominant hotels end markets. These transformational renovations are expected to have a useful life of seven to 10 years, well help our property gain market share and outperform through the next cycle.
While our revised Capex plan assumes projects will be completed substantially as scheduled.
Cobot 19 has impacted our ability to implement renovations as supply chains have been disrupted and certain state and local orders have deem construction not essential we will continue to provide quarterly updates on our capital plan for the year.
As I reflect a leading coast over the last few years and now through this crisis and it's gratifying to note that our prudent and disciplined capital allocation strategy towards the end of the cycle has served our stakeholders well.
In 2018, and 2019, we sold $3.3 billion of our relatively lower quality and lower total revpar assets at the top of the market.
Additionally, we capitalize on the favorable debt capital markets last year to execute over $3 billion, a refinancing which extended our debt maturities and reduced our borrowing cost at an opportune time.
While we also acquired $1.6 billion of high quality assets.
Bought back $629 million stock and invested in developing and Redeveloping parts of our portfolio. We deployed each of these value creation tolls in a measured and disciplined manner not knowing when the cycle would end, but discerning that balance sheet strength and capacity would be a paramount.
Importance when it did.
Today as we enter a new lodging cycle, we feel hopeful about a future where the threat of this pandemic has passed.
In the meantime, we're taking the opportunity. This crisis provides the further strike that our operating model and to learn how to generate higher levels of profitability at lower levels of occupancy.
We're excited to be entering a new cycle with the highest quality portfolio of iconic in air replaceable assets in the company's history and likely in the lodging industry.
When demand recovers, we believe that the quality of our assets many of which will be newly renovated will be a true differentiator. It will help us gaining revpar index share and outperformed the industry. We continue to believe and the strength of both geographic and demand diversity through the cycle.
Geographic diversity will step us through an uneven recovery at various states embark gets Andrew down at different times demand diversity will help us drive optical revenue management and pricing through the cycle.
Finally, we expect our relative balance sheets and to continue to be a differentiator.
Will provide us with greater flexibility to capitalize on future long term value creation opportunities that meet our strategic objectives with that I will turn the call over to Brian.
Thank you Jim good morning, everyone.
Prior to the spread of the pandemic in the United States business was off to a strong start in 2020.
For the total portfolio in January and February Revpar was up 220 basis points, driven by a 120 basis point increase in occupancy.
Total Revpar was up 490 basis points for the same period.
As a result at that point in the quarter. We were ahead of last year by approximately $20 million.
March however, experienced the 65% decline in Revpar, driven by a 52% drop in occupancy.
We lost 730000 room nights due to shelter in place orders and widespread changes in business travel policies.
March room revenues declined by $200 million year over year and drove a first quarter Revpar declined 23.3% as occupancy fell 17% year over year.
Our first quarter results include a 43 million dollar wage and benefit expense associated with moves to suspend operations and the necessary changes to hotel level staffing.
These costs include an 8 million dollar cash payment to hotel employees in March and a 35 million dollar accrual for for a little benefits in April and May.
If our operators extend those benefits for the approximately 80% of the workforce that is currently furloughed.
We would expect the carrying costs for those employees beyond may the average $15 million to $17 million per month for the entire portfolio.
As Jim mentioned, we have worked closely with our operators to reduce operating expenses and expect to realize the 70% to 75% reduction in hotel level operating expenses in April compared to our initial forecast.
As a reminder, our initial forecast in February implied that hotel level expenses at the mid point would be approximately $3.8 billion for the full year.
On the revenue front, we expected total revpar for April will decline by 90% to 95%, reflecting the extremely low occupancy in most markets.
Demand in April has largely been restricted to medical professionals and airline crews.
For example, the shared some New York Times Square and the New York Marriott Marquis achieved occupancy is close to 50% in April primarily driven by medical and first responder business.
Being two of the largest hotels in the city to remain open has provided the sheraton and the marquee with a great opportunity to cancer. This business.
With New York City, Thankfully continuing to make progress from earlier peak infection levels. This business is expected to taper off in early to mid may.
By the end of March we hit suspended operations at 13 properties.
As occupancy has continued to decline through April we suspended operations and an additional 22 properties, bringing the total number suspensions to 35.
A typical staffing model for properties that have been suspended include a management team of five to seven associates working a schedule that has been reduced anywhere from 20% to 40%.
Further there is management oversight of the security Department and in certain circumstances properties have layered in additional sales and event Department management to assist with the rescheduling and planning of future group business.
Hourly positions are generally lend mid to single associated per shift in the engineering and security departments.
Properties that are that are operational will generally have the same base management coverage and suspended properties as.
As well as minimal rooms management, though again working at significantly reduced hours.
Typically these managers are covering both the housekeeping department in front desk.
As well as actively working a shift in one of those departments.
Hourly positions. In addition to the security in engineering positions. Previously mentioned May include a housekeeper shifts based on occupancy and front desk coverage.
In the very limited cases, where foodservices provided one shift or kitchen shift would be added to prepare a limited to go menu.
Although visibility remains limited we do not anticipate additional suspensions at this time.
Timing with regard to reopening the 35 hotels were operations are currently suspended however remains unclear.
Our reopening criteria are based on the timing a state and local authorities and the pace of our bookings and revenue growth projections.
We are working with our operators to determine how cost can be managed through the impending recovery such that we can achieve breakeven levels as quickly as possible with the goal of generating higher levels of profitability at lower levels of occupancy overtime.
Shifting to market performance.
Our top performing markets in the first quarter, we're all in negative territory, although they outperformed the S. T R upper tier segment in their respective markets.
Top performing markets include Phoenix, San Francisco, New Orleans, Atlanta, Miami, San Diego, New York, and the Florida Gulf Coast.
The Underperformers, we're San Antonio.
Maui a wahoo.
Jacksonville Orange County.
Denver, Northern Virginia, Washington DC.
Seattle and Houston.
The majority of the $630 million a total group revenue loss that Jim mentioned has been driven by six markets.
San Diego, New York Orlando.
Phoenix, San Francisco and Boston.
However, we have experienced cancellations across the portfolio with 24 markets showing greater than $5 million in total group revenue cancellations.
We're not providing any 2020 guidance at this time.
Our lack of visibility regarding the depth and duration of the pandemic.
The timing of the reopening of individual states and localities.
And the expected operating restrictions for businesses as well as individual company travel restrictions, it's simply too uncertain at this time.
I would note that in prior recessions peak to trough declines in hotel level EBITDA have been roughly twice as large as the peak to trough declines in revpar.
Although this two to one ratio should have deteriorated considerably in a near zero revenue environment.
We believe it will continue to hold true for our portfolio due to our significant success and reducing fixed cost at the property level.
Our confidence in our ability to not only persevere through this crisis, but to be able to drive value for stakeholders is based on the strength of our investment grade balance sheet.
We have significant liquidity to withstand the worst case scenario of a complete shutdown of our entire portfolio until year end 2021.
Subject to our success in obtaining covenant waivers for our credit facility.
Moreover, we have no significant debt maturities until 2023.
And have approximately $2.7 billion of available cash as of April thirtyth.
Finally.
The company has access to other sources of liquidity, including secured debt.
Asset sales in capital market transactions.
To be clear the company has no need to tap into additional sources of liquidity.
But I mentioned them to provide reassurance that we do not expect liquidity to be an issue for host.
Today more than ever we believe that host hotels and resorts is the premier lodging REIT in the industry.
We have a high quality well diversified portfolio, whose consistent performance is driven by strong in house analytics and by working with the best operators in the business.
With the only investment grade balance sheet, among lodging Reits, we are well positioned to deal with this crisis and to continue to execute our strategic vision to create long term value for our shareholders.
Thank you and with that we will now be happy to take questions to ensure we have time to address questions from as many of you as possible. Please limit yourself to one question.
Thank you not to conducting a question answer session. If lets me, placing the question Q. Please press star one and telephone keypad a confirmation told will indicate your line is in the question can you give me press star to if you'd like to move your question from the Q for participants using speaker equipment, maybe less.
Turning to pickup for handset before pressing star one.
One moment, please and then as a reminder, that's one question to return to the Q.
First question today is coming from Anthony Powell from Barclays. Your line is not a lot.
Well good morning, everyone.
Good morning, Anthony I hope, you're well morning, Oh, Yeah, well in New York Ah things are okay here are getting better.
Just a question on your husband soon when the amendment that you're seeking a lot of the other amendment.
Once restrictions on.
Dividends buybacks and acquisitions.
How do you mentioned that you maintain flexibility to take advantage of opportunities in Europe.
And your balance sheet strength, you're going to you kind of securing amendment or.
So you can give you more.
Confident in covenants.
Sure.
He made a conscious decision to.
Let some time pass before we are fully engaged with our bank lending group.
Which I looked at its been incredibly supportive we have a longstanding relationships with all of the lenders.
And our credit facility, so I'm going back 25 years since.
The time hosts though was formed so.
We are we're in a really unique position because as you heard today we have.
The run runway in a very worst case scenario to take us through.
2021 from a liquidity perspective, we do have <unk> access to multiple sources of capital should we need it which we don't believe we're going to need it will only needed to play off and at the at the time when opportunities present themselves and we can.
See greater visibility going forward. So it is we're having conversations with the bank group were keeping into consideration.
Taking into consideration a maximum optionality and flexibility.
To put us in a position due to play offense going forward.
And yeah, we feel really good about the fact that we're going to be in compliance with all of our credit facility covenants through at least the second quarter, a and I would expect in the next several weeks, we will being a position to announce Ah Ah publicly through a press release, an 8-K, a with the amendment.
To that credit facility look like.
Got it. Thanks, just a clarification I believe you said second two to one.
Yeah, right party need without acquired versus this time, I think SCR had 50% revpar decline assumptions. So this year does that mean, it's that you'd rather be zero. This year in that environment with bottoms up down or was that too simplistic some.
If you believe STR data that that would be a correct assumption.
Got it thank you.
Your next question is coming from Michael Bowen, Saudi oil from Baird. Your line is a lot.
Morning, Mike.
Just thinking on that same dubs playing offense.
And just kind of one what are you queuing off of some make that decision and then.
How are you thinking about the different ways to ultimately create long term value today or <unk> or at least when those opportunities present themselves.
I like where we're adding a unique position given the strength of the company and the fact that we came into the year at 1.6 times debt to EBITDA with $1.6 billion of cash on the balance sheet.
You know, we we are truly in a position to persevere through the downturn through this pandemic.
I'd come out the other side and in a position to the playoff and now you know when when does that happen I.
I think right now is that it's very premature at this point in time I you know I don't think.
You're going to see us or anybody else and in a position to acquire hotels until we have greater visibility on the case. So how the U.S. economy is going to perform and how it's going to recover I think everyone is an agreement today that we are interest.
Fashion, Oh, we just don't know the depth of the recession, nor do we know the duration of the recession.
There are numerous conversations occurring.
Between hotel owners.
And lenders today with respect to you know waivers a interest forbearance.
It's a question of how that's all going to play out and where the opportunities are going to be I think it's a little too soon to know, but when we have visibility and when we start seeing.
Opportunities come to market you know, we will be in a position or to take advantage those opportunities, we're talking to our bank group about giving us.
Some optionality to up to acquire hotels.
As we move forward obviously, the hotels are gonna have to be a strategic fit for us a they're gonna have to be priced appropriately they're gonna have to allow us to believe that we're going to be able to create shareholder value or we're going to continue to be disciplined and our approach to capital.
Allocation, we think it served us very well toward the end of this cycle and giving us an opportunity to play offense.
Thank you. My next question is coming from rich Hightower from Evercore. Your line is that a lot.
Hi, good morning, guys.
Good morning Rich.
So Jim I want to go I want to go back to the sort of the breakeven occupancy calculation and then I think I think you guys said that it includes an assumption for 15% to 30% declines in 80 yard I'm just I'd like to maybe here your opinion on the art of.
Pricing a hotel room.
Coming out of covert given that everything is at a standstill and starting from scratch. How do you how do you anchor the customers expectation to that sort of a rate.
Starting from zero base and what do you think the progression for 80, our you know might be over the next few years kind of in that framework.
Sure.
You know.
We are having daily conversations with our operators.
Regarding reinventing the revenue management model.
We don't think revenue management is by anything right by any means that thing of the past today, we think it's more important than ever and you know our primary concern is going to.
Be focused on rate integrity, and not rate degradation or it's a it's tricky and a low revpar environment go occupancy environment will grant you that Ah, but you know as an example, and.
And the month of of April we ran at a very low occupancy for the portfolio of about.
13%, though just north of 12%, we ran $135 a 80 art.
It doesn't sound, great, but when you're selling rooms in hotels that you know in many instances if you put new York Aside are running at low single digit occupancy is to maintain.
A rate a in that level.
It is is pretty good from our perspective so.
As we look at breakeven.
Occupancy and they'd be ours, it's really.
A quite a variable exercise its going to change hotel by hotel, it's going to changes occupancy and demand increase and expenses creep back into the property. So that the numbers we gave you.
With respect to occupancy declines in HDR declines are really based on the low level of expenses that were experiencing today. So as those expenses increase its going to be a balance.
Between.
Incremental expenses going into the properties a against occupancy at 80, our game is that that's helpful to you rich.
Yes, that's helpful. Jim that's up off out of the Kim Thanks.
Our next question today is coming from Smedes Rose from Citi. Your line is not a lot.
Hi, there I just wanted to ask kind of bigger picture I kind of picks up.
Rich's question.
No I think coming into this typically labor costs from the car typical hotel at the end kind of in the 40% to 45% range.
Assuming we returned to some kind of more normal you know business environment, where do you think that number. It can go to it seems like there's going to be a lot of fill out of thoughts around maybe not cleaning hotel rooms, but guests are using them, but there might be more cleaning outside of the rooms, or where do you think that could just moved too.
Or do you think it just kind of stays the same.
Everything's been reallocated.
I think it's all I'll start a I'll give you a couple of thought your phenomena aster Rob to.
Jump in on this one you know where I.
I can tell you this.
We view this opportunity this crisis truly as an opportunity to redefine the hotel operating model and.
There are going to be incremental costs associated with cleaning.
And sanitizing, because we think.
That that is going to be.
Critically important it's always been important to to the traveling consumer to know what they're getting when they check into a hotel room and.
The fact that that the majority of our properties are managed by Marriott and high it gives us great comfort because they are at the top when it comes to cleaning and sanitizing standards and their outreach to consumers has a has been meaningful and it will continue to be.
Meaningful. So we think this is truly a distinguishing factor relative to the independent hotel operator, because the customers are going to be comfortable that and that if they're going to say the Marriott managed hotel or high managed hotel.
It's going to be sanitized, it's going to be clean.
And you know safety is Paramount today, I mean, we talk a minute ago about you know 80 are and I can tell you based on.
[music].
Sub focus groups that have taken place the customers don't really.
Care as much about 80 are as they care about their personal safety. So we think that between.
The brand standards with respect to cleanliness and cleaning and the the fact that.
We are affiliated with the best loyalty program in the space, there's going to give us a true competitive advantage as we come out of its up.
Pandemic, so all that dropped to give you a little more color on how we're thinking about the hotel operating model.
Hi, It's me I want to start off by saying that our managers are truly committed to taking cost out versus putting cost back in.
And where the opportunity really exists is going to be I would put in sort of three broad buckets wanted them to be reduction of above property costs.
Second is the brands are really focusing on brand standards and figuring out which brand standards are cake and can be up either eliminated completely or modified and the third is really adapting to the changing customer preferences, particularly leveraging technology to think about would we really need the fund.
That as we know what today with the touch this technology that does exist with the customer wanted to enter into black during the second experience so that.
We brought buckets I was I would put it into.
Incremental costs associated with meaning are we believe should be offset by improvements in productivity.
Okay. Thank you.
Thank goodness question today is coming from David Katz from Jefferies. Your line is not a lot.
Hi, good morning, everyone. Good to hear everyone's voices. Thanks for taking my question and for all the information I wanted to ask about group business. You know, we're wondering and and endeavoring to research around groups that you know, maybe postponing or rebate.
Okay and later on.
In the interest of avoiding a cancellation fee and or you know sort of kicking the can down the road a bit.
You know this maybe more of a qualitative question you know relying on your experienced intuition, but I just wonder what you think about that.
You know they David I think that we think as they are a management team and then consultations with our operators that.
Yeah, we agree with the premise that we're going to see a return of the leisure customer first primarily led by Dr. to destinations. A then we'll see a return of the business transient cover that a customer and lastly, we'll see a return of grew.
Route.
Thank you an x. question is coming from Robin Farley from U.B.S. Your line is not alive.
Great. Thanks.
<unk>.
That's an address already about about potential emanate I guess one question I had you made a comment in the introductory remarks about I think you said group for next year being flat or pays being flat or something I I guess I just wanted to get a sense of.
How much are you seeing people holding off on booking new group for for 24 2021. So in other words you know maybe you are still flat with prior but how how does that pace look in terms of you know our people holding off on next year already thanks.
Yeah, Robin I think but you know our our peace our numbers came down a bit.
<unk> in terms of group booking pace, but I I believe we said that you have 2.3 million room nights on the books for next year.
Which is about what relative to where we were at the same time last year. So.
People were so so booking I think it it it really goes to you know the the uncertainty surrounding.
The.
The scope and and that the of the crisis. You know, we we think group is a very viable part of the hotel business going forward.
Associations have to have group meetings to survive, it's part of how they make money.
But you know the intangible with the fact that.
You know group meetings are very important for interaction and building relationships.
And building trust among the people that participating group meetings I. We we don't believe that this is able to be replaced digitally it's just not going to happen over zoom call. So if we can feel that they group is going to continue to to be a viable part of the business I think search.
Job has something he won Dab.
Oh I would just add more I think we looking out into the future 22 23, our total our group paper's still pretty strong at a positive 2.5%.
I think are next question things coming from Bill Crow from Raymond James Your line is my life.
Oh, good morning folks Jim <unk> I think you mentioned you collected.
$20 million to $32 million of cancellation fees split between the first quarter second quarter I'm just.
I'm, just curious about that because it seems awfully tough.
<unk>.
Piece, especially in the second quarter, given the locked down and the less than 10 people meeting restrictions and things like that can you can you give us some commentary on it.
Yeah.
That's with the cancellation fees that we collected were collected early in the year early in the pandemic and we collected 30 million total we recognize 10 million in the first quarter.
I would not expect that that you're going to see that caters to continue as we move forward. So we are.
Work more interested in working with our our customers many of whom are long term customers.
And we want to maintain those relationships and encourage them to rebook their business at our properties.
Thank you next question is coming from Chris <unk>, who learned is now line.
Hey, good morning, guys, <unk>, what ASCII and we'll morning, one I see a little bit of longer term question. I know you guys have made a lot of progress over the years.
Food and beverage efficiency and getting margins up. So the question is as we look out three to five years. You know do you think it's going to become.
I don't know, whether it's necessary or ideal to maybe have smaller food and beverage operations and I know that you need it and and and a lot of your convention hotels, but a lot of the other hotels seems like you know there's always a cap on profitability. So you know do you think that's something you look at during this downturn and it looks different coming out.
Absolutely you know we are having conversations already with our operators regarding the need for.
Three meals a day restaurants in in many of our hotels.
No, we're having god conversations around eliminating breakfast buffets in the restaurants, maybe only opening the restaurants for breakfast you know it.
It. It this is an opportunity to rewrite brand standards going forward. So you're you're you're spot on that that this is something that we're thinking about and talking about.
Thank goodness question is coming from John Kelly from Bank of America Feline is alive.
Hi, good morning, everyone.
Jim I was hoping we could you spend a little bit time on the prepared remarks. He talked about you know you're sorta opportunistic sales on some of the non core assets in the in the portfolio and obviously you're quite successful on out over the last couple of years is there anything remaining in that.
Buckets that you think you know needs to be a drastically I. Appreciate it's not the kind of ideal time, but sort of maybe just what's the comfort range with where you're out with let's call. It to go forward portfolio number one and then number two you know in that in that group of hotels that you know if there if there is anything that doesn't that it doesn't fit the profile.
Going forward is there you know a need to reopen in in this environment. How do you think about sort of a longer term closures and and maybe property type obsolescence for some of those let's call. It noncore in encore assets.
Sure. It <unk> I, you know I I've said overtime that we are very comfortable with the composition that portfolio. We have today, our sales are always opportunistic.
<unk> hotel, when we feel that the price where receiving exceeds our whole value, which we do on a on a regular basis for each property in the portfolio.
So you know, we'll continue to be opportunistic in the future you know today.
There's no need for us to so any properties and in this environment.
Where we think pricing would be very challenging we'd much rather be in acquiring.
And take this opportunity to to add to the the portfolio that we we have today to continue to upgrade the the quality through acquisitions as opposed to sales. So the short answer is will be opportunistic when the time is right.
Take the next question is coming from Thomas Alan from Morgan Stanley Your mind is not alive.
Good morning, <unk>, you talked earlier about some more optimism around and drive to resort markets. There was some positive data out of SGR earlier. This week I are you, saying any increase Brookings for your career resorts, Hey data points you can give.
Sure <unk> you know that that is that's it a green shoots that we saw in May you know, we we feel that occupancy hit a bottom in April as Brian mentioned in his comments you know the business that we book in April was really related to medical and airline.
Cruise and you know some first responder business hits or another hotel some national guard business things of that nature, but.
And two of our drive to properties in particular, we're seeing very good booking numbers for memorial day weekend at the Ritz Carlton Amelia Island, we we are seeing business on the books that would lead us as.
We sit here today to 60% occupancy over memorial day weekend and at the <unk>.
And Saint Petersburg Beach, another a terrific resort property, we expect to see occupancy in the fifties as we sit here today and you know hopefully those numbers will continue to grow. We're also seeing good booking activity in June and July in June we're seeing booking activity.
15, <unk>, you know, 13% to 15% range in July it's significantly higher <unk>, so, let's let's keep our fingers crossed and and hope that that business continues to grow.
Bank or next question today is coming from Steve Brunner from RBC capital markets. Your line is not alive.
Thank you Hey, guys, how everyone's do well. So I know you guys stated that you don't have at this time timing I'll be opening by specific markets, but if you guys had some sort of high level less than that you're going to make I guess, an educated guess, which markets do you do you guys see opening first.
You know, it's it's a tough question to answer because 14 at the top 20 markets still have a restrictions are in place with respect to when when the people can get back to businesses normal. So we we just don't know you know what I will tell you is that.
It is we've discussed you know and everyone believes that drive to leisure demand is going to be the first part of the the business to.
To return we have [noise].
Over 13000 rooms and drive to markets today in those markets include Florida San Antonio.
Phoenix Chicago for the summer.
Los Angeles, Orange County, and San Diego. So we are closely watching when restrictions are lifted and you know we would hope that those that hotels in all of those markets that I just mentioned that 13000 rooms that we have will be some.
The first to reopen but we at this point time, it's it's difficult to really.
Put it put a date on when that's gonna happen because it's out of our control.
Thank you we should have our question has recession, who lives in gentlemen that doesn't include things teleconference. Hear me disconnect provided this time and have a wonderful day. We thank you for your participation today.
Well. Thank you all producing us on the call today, we appreciate the opportunity to discuss our first quarter results with you.
And we look forward to Berkeley.
[noise] and we look forward to virtually seeing you at Knavery and talking with you in a few months discuss our second quarter results.
Have a great thing everyone and they say, we we'll all get through this pandemic and before we to senior person soon.