Q1 2020 Earnings Call
Good morning, ladies and gentlemen, thank you first any Mike welcome to the Sunstone Hotel investors first quarter 2020 earnings.
At this time all participants are in listen only mode. Later, we will conduct a question answer session and instructions will be given at that time.
I'd like to remind everyone that this conference is being recorded today.
2020 at 12 PM Eastern time.
I'll now turn the presentation over to Aaron Ramsey, Vice President corporate Finance and Treasurer. Please go ahead.
Thank you Ana and good morning, everyone.
By now you should have all received a copy of our first quarter earnings release, and supplemental which were made available earlier today.
You don't yet have a copy you can ask them on our website.
Before we begin I would like to remind everyone that this call contains forward looking statements that are subject to risks and uncertainties, including that was describing our perspective. These 10-Q's 10-K and other filings with the FCC, which could cause actual results to differ materially from those projected.
We caution you would you consider these factors in evaluating our forward looking statements.
We also note that this call may contain non-GAAP financial information, including adjusted EBITDA.
FFO and hotel adjusted EBITDA margin.
We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today, or John Arabia, President and Chief Executive Officer, and Brian Julia Chief Financial Officer.
After our remarks, we will be available to answer your question.
With that I'd like to turn the call over to John. Please go ahead.
Thanks, and good morning, everyone.
Me start off by saying I Hope, you and your families or safe and healthy during this incredible talent.
And also we very much appreciate you taking the time.
Out of your busy schedules to get.
What is.
Very important update company.
Much has changed in the three months since our last earnings.
Earnings call as the country.
Lodging industry intercompany I've had to react to the health risks.
And all mixed ruche close by coated 19.
Today I'll provide an update on the following.
First what has transpired at our company over the last three months.
Second.
We reacted quickly in the early weeks or the pandemic to protect our company to mitigate or damages and to preserve our already significant liquidity.
Third the current status of our portfolio.
Operating environment.
Finally, our focus on methodically managing our business to not only protect our company, but to position our company to take advantage of the significant dislocation that is likely to occur.
So let's begin with a review of the past anymore.
Following our earnings call on February 19th the.
The world generally seem to be business as usual.
We continue to execute on our business plan pressed forward with ongoing capital projects work on additional asset sales and gradual we bought back common stock as our share price declined.
In fact, we're quite pleased with our portfolio operating performance as we began 2020 as hotel EBITDA.
With hotel EBITDA exceeding our budget in both January and February.
In early March right after the Raymond James in city conferences, it became clear the concerns over coburn like teamwork crushing.
Major sporting events festivals and corporates as we're being canceled.
Stayed home orders and travel restrictions never before considered a possibility.
Became increasingly common.
Early to mid March it became apparent the travel was slowing materially.
An action was required.
We reacted quickly.
Working with our operators and in consultation with.
The direction of local health officials.
We began the systematic process of temporarily suspending operations at many of our hotels.
Between March 12 in April six.
We suspended operations at 14 of our 20 hotels in coordination with our property operators dramatically reduce the service levels are amenities of those hotels.
It had continued operations in order to mitigate the spread of cobot 19.
And to minimize the financial losses.
And the early weeks or focus was squarely on maintaining liquidity and determining how much more sizable cash balance we would use each month so.
Total operations were suspended or significantly curtailed.
At that time, we knew that are significant cash position or leverage are well positioned in recently renovated portfolio and or strong relationships with our capital partners gave us significant confidence that we were among the best position to whether this unprecedented store.
It was this confidence that gave us the flexibility to barrels or short term needs for liquidity with or ability to manage and invest in our business in order to maximize our long term value.
With this balanced approach we did the following.
First as I just mentioned, we suspended operations at 14 of our 20 hotels mature we couldn't curtailed operating expenses at those hotels. It remained in operations. These steps were very difficult and resulted in a terrible number of layoffs and furloughs.
At the same time working in conjunction with other operators, we decided to maintain various disciplines at our hotels.
Alluding to hotel executive change Engineers security staff, HR personnel and sales professionals.
We elected to keep these disciplines at our hotels in order to maintain and protect the facilities.
Staying in contact with and help displaced associates.
And most importantly to mean hotels relationships with its customers to show future business. So we can get back to business as soon as practical.
Well. This strategy will result in slightly higher monthly cash burn rate. We believe strongly the is the right thing to do for hotels.
Tell associates and our long term value.
Not all owners have taken this approach.
It is more costly in the short term.
We think it's a little right long term decision.
Second.
We postponed approximately $35 million of capital projects, leaving approximately $40 million or 2020 budgeted renovations.
At the same time again with a balanced approach to our business.
We accelerated several very disruptive projects that were on hold waiting a quiet time to be completed.
These projects, which add up to roughly $6 million to $8 million total capital investment.
We will be completed while the hotels of sustain a suspended operations.
Saving us many millions of dollars of operating displacement had we completed the projects when the hotels were fully operational.
For example, we're adding one night decks to many of our ground floor rooms, and why were.
Repairing the escalators to conduct the lobby to the meeting space at a Renaissance DC.
Putting in a new for the treatment the Renaissance Orlando.
Third.
We have cut back on corporate expenses.
These corporate expense reductions are likely to result in cash savings of approximately $2 million to $4 million this year.
Fourth.
The abundance of caution and during the period.
Where we were working to get a better understanding of what our cash burn rate was likely to be.
We drew down $300 million on our credit facility.
Following that draw.
We're working through the process of attaining covenant relief.
It will likely be needed on our credit facility.
From loans private placement notes.
There can be no assurances that were reached agreement with these capital partners. We believe we believe that we're in the later stages of the process obtaining a covenant relief package, which is expected to provide access to the facility farms.
While providing us flexibility.
Manage our business without some of the financial limitations that those who may be more highly levered are likely to a killer.
And finally.
As a result of our discussions with our unsecured lenders, we proactively decided to temporarily suspend our common dividend payments and share repurchase activity.
We view this as a small price to pay in the short term.
In return for the outage stability to the company.
Flexibility, we expect to receive from our debt capital partners.
Where does that leave us.
Well.
Current environment with most hotels closed or virtually no revenues.
We expect to incur property level cash losses of approximately $18 billion to $21 billion them up.
In addition, we expect to occur on average $10 million to $11 million a month corporate expenses debt service and other expenses, which includes approximately three to 5 million monthly capital investments at approximately 1 billion them up a preferred stock dividends.
When combined.
We estimate our all in cash burn rate to be approximately $20 million to $32 million them up on average.
We would expect this cash burn rate to gradually decline.
As we methodically reopen hotels.
And as occupancy and cash flow build.
But the ended the quarter, we had approximately $547 million of unrestricted cash excluding the previously announced 300 million dollar line draw on our 500 billion dollar credit facility again, excluding the previously announced 300 million dollar line draw on our facility.
<unk>.
Taking to an extreme we estimate that are significant cash position and access to our sizable credit facility could sustain the current limited no revenue environment for roughly two and a half to three years if required.
Furthermore, the situation if the situation became worse.
You could make incremental touched or capital spend corporate expenses and in other areas.
That said, we don't expect to need anywhere near that at mouth.
Financial runway.
Which will leave us with more capital to go off fence earlier than most.
As all of you know we have taken a conservative approach to our balance sheet based on our fundamental view.
With the significant operating leverage at hotel ownership should not be compounded with high financial leverage.
This view has not always been popular nor appreciated.
As we have always stated we are positioned our balance sheet to be able to incur a 50% decline in same store EBITDA and still have offensive capabilities.
Well this downturn is worse than we had planned for our conservative leverage profile gives us the safety to whether a no revenue environment for extended period of time.
While also positioning us to be one of the first companies able to take advantage of the significant dislocation, we expect them to private hotel market.
Very few other hotel owners share this enviable position and we fully expect many hotel owners will be significantly impaired or worse for an extended period of time.
Particularly if the industry comes out of this pandemic only to deal with recessionary hotel demand and pricing levels.
Our balance sheet was built for a sizable recessions.
Most others were not.
So now, let's turn our discussion were portfolio.
What we're seeing on the ground and how we expect to reopen or hotels.
As I mentioned earlier between the Middle of March in early April we suspended operations of 14 of our 20 hotels.
Six hotels to remain open include Boston Park Plaza.
So I was Baltimore.
Hilton Times square.
Renaissance LTX Renaissance long beach, and the embassy suites will oil.
A couple of those hotels have secured government business, including housing the national guard or military business or military personnel excuse me.
And I've recently run daily occupancy levels in the low 20% range.
As for group business.
We first started witnessing group cancellations around the time of our last earnings call in mid to late February.
I'm sure you're all aware group cancellations increase meaningfully in March and April and have continued in early may as shelter in place orders have been extended and people remain at first to Congregating.
You may 5th we have received group cancellations that represent approximately.
376000 room nights and $137 billion, a group revenue, which represents approximately 29% of our 2020 budgeted group revenues.
Most of these cancellations or group meeting scheduled for March through June.
Approximately 72% of our second quarter budgeted group room nights have cancelled and we would anticipate most of our remaining.
Second quarter group rooms will cancel as well.
As of March 5th only 18% at 1% of our budgeted group room nights of canceled for the third and fourth quarters, respectively.
However, we would expect these figures to continue to increase until there is greater clarity around our ability to congregate and an improvement in the confidence of the traveling public to do so.
But not all the news is negative.
During the rapidly changing landscape the month of March.
While significant numbers of current your group rooms were being canceled.
Our hotel sales teams grew our portfolio room nights on the books for 21 by 10000 rooms, and that an additional 14000 room nights for 2022.
Our strategy of maintaining several sales professional all property is paying off.
In April.
In the midst of closing hotels.
Hotel sales teams booked new group business, not including any cancel or rebooked events, but true new business.
For all future years by nearly 23000 room nights showing that customers are looking to the future.
In addition, we have already rebooked.
We're in the process of amending contracts on roughly 15% of a cancel group business.
And another 25% of the cancel group business has indicated their intent rebook and are working with the hotel sales professionals.
As these groups that have rebooked or intend to rebook.
Compromise for larger events.
Equally to nearly 50% of the rooms that have been canceled date.
So what type of business will recover first.
Well, we reopened hotels, but what are we doing to reopen it sells.
Well.
We believe drive to leisure demand is likely to come back fairly quickly.
There is mounting evidence that there is significant pent up demand.
Travel and to vacation.
We also believe that there'll be a gradual recovery and commercial transient business as their travel resumes.
And finally, we expect a delayed recovery and large group business, particularly of social distancing mandates remain in place for an extended period of time.
Well, we are working daily with our operators to plan for the eventual reopening of our hotels.
The truth of the matter is we don't yet know the specific timeline of resuming operations at each one of our hotels.
As it stands today.
Subject to change.
We are likely to see a few of our hotels reopened in June.
With others reopening in July.
The recovery is likely to be gradual and hotel operations in service levels will have to change.
Order.
To properly address health and safety concerns and the financial reality, what is likely to be low occupancy is for some period of time.
Our team is working directly with our operators daily to finalize the details related to new openings cleaning and staffing standards and the impact on our margins and financials.
We will have more details to share with you regarding these modified standards as time goes on.
That said I need point out that all operating paradigms have been thrown out.
It all operating models are being reviewed for the future.
Well this is a challenging process I believe strongly.
That long term the industry will be better off.
Before I turn it over to Brian.
I would like to take a second to thank our operating partners.
Moving all of those at Hilton.
Marissa Hyatt and our independent operators for their herculean efforts over the past three months.
This is by far the most difficult operating environment, our industry has ever faced.
Our operating partners in the hotel teams have worked around the clock with fewer resources to handle this challenge as best as possible.
I'd also like to thank our hotel executives not only for their effort in protecting our hotels, but more importantly.
For assisting our out of work to tell associates, many of whom have worked at our hotels for decades.
I also want to thank our team at sunstone for jumping into action are reacting quickly to this crisis and putting us in a position not only to weather the storm, but also to come out of the stronger than before.
And most importantly.
A message to our hotel associates.
The heart of our industry.
Please know that we're doing everything within our power.
Reopened our hotel safely.
And as soon as possible seeing come back to work do which you do best.
With that I'll turn it over to Brian.
Thank you John and good morning, everyone as of the ended the quarter, we had $847 million unrestricted cash, including 300 million dollar draw on our credit facility.
As John mentioned, we're currently working with our Bank group and secured note holders to amend our in place credit documents.
And expect to agree on a waiver of financial covenants over the coming weeks.
The intention of the waivers to provide relief during that time period in which trailing financials will be impacted by the coven 19 pandemic.
As we previously discussed our balance sheet was built to easily maneuver through a significant recession. It. Unfortunately was not to design to withstand and ongoing global pandemic.
That said, while we anticipate that we will emerge from the covenant relief period with higher leverage than where we stand today, we expect to have significantly more flexibility and ability to take advantage of opportunities than those that went into this with higher leverage.
It is important to note into reiterate appointed John made.
Based on our current cash balance excluding the 300 million dollar draw on our credit facility or any future draws on our credit facility.
And just to be clear as of the end as if the ended the first quarter. This is a cash balance of approximately 547 million.
We would have approximately 18 months of liquidity again that is 18 months of liquidity before we would need to take on any additional leverage.
From proceeds from our liner and yet their capital source, which could extend that liquidity to up to two to two and after three years.
This assumes no change to the operating environment, meaning the 14 hotels that have suspended operations continue to be suspended. This also assumes that we continue with our current planned capital investment, which could be reduced if needed.
We do not him implement any additional cost mitigation measures.
This is an important distinction when we come out at this we will have significantly more capacity than others. Our balance sheet was already designed to handle the major downturn. So even if we emerge from the pandemic into a recessionary macro environment, which is likely.
We will not need to access additional equity capital to shore up our balance sheet or rightsize our leverage.
This may not likely be the case with everyone in our industry.
Shifting to first quarter operations financial results are provided in our earnings release and in our supplemental.
First quarter operations were negatively impacted by the dramatic reduction in domestic travel resulted from coven 19 pandemic.
First quarter adjusted EBITDA was 14.1 million in first quarter adjusted FFO per share was a loss of one cents.
First quarter's earnings were negatively impacted by 10.1 million expense related to current and future wages and benefits for furloughed or laid off hotel employees.
During the first quarter, we recorded impairments totaling 115.4 million, which was predominantly the result of an impairment to Hilton times square, which we wrote down by approximately 108 million to a value of 61 million and at the Renaissance Westchester, which was written down by approximately 5 million to us.
You have 30 million.
In addition, a 2.3 million dollar impairment loss was recorded to write off the expenses related to an abandoned expansion project at the Hilton San Diego Bayfront.
The impairment at the Hilton Times Square was the result of deteriorating long term profitability expectations. The disputed 2020 ground rent and property tax resets, which could result in increases that would materially exceed our previous expectations the upcoming maturity of the $77 million secured mortgage.
And most recently the catastrophic the fact that covered 19 pandemic.
The impairment taking it to help and reflects the cumulative impact of all these challenges and is meant to reflect what is current market value.
On a current cash flow basis, we expect the hotel to lose between six and 8 million EBITDA This year, which could further deteriorated to New York market does not see.
Travel demand return during the second half of this year.
Based on our current projections of loss for the near term this significant increase in property taxes, the uncertainty around the ultimate outcome regarding the ongoing negotiations over the increase to ground rent.
And the upcoming mortgage maturity. We're currently working with the special Servicer, which May result in the appointment of a receiver.
This is not decision that we take lightly but given the challenging circumstances in the confluence of material valuation hits. This hotel has sustained we believe that this is the right outcome for our shareholders. While we did not anticipate the pandemic. We did identify several of these issues and had been working diligently for over a year.
Exploring every and any potential opportunity to work with the various parties to salvage value.
Ultimately, we were unable to reach resolution with any of our Counterparties that would have resulted in this property remaining a viable going concern, giving its debt levels.
Now turning to dividends as John mentioned in an effort to preserve liquidity, we have suspended our common dividends, depending on whether or not there is taxable income this year will determine when our common dividend will be reinstated.
Separately, our board has approved the routine quarterly distributions for both outstanding series of our preferred securities.
With that I'd like to now open the call the questions and have please go ahead.
Yes, Sir thank you.
Okay question. Please pick all by pressing star one on your telephone keypad experiencing a speaker. Please makes or your mute function that turned off Polaris adults reach our equipment.
Again that it's Darren.
I'd like to ask a question.
Well now take a question from Lukas Hartwich with Green Street advisors.
Thanks.
Close hotels I'm, just curious what markers you're using to gauge when to reopen properties.
Hey, Lucas good morning.
Our asset management team has been working daily with our operators to try to answer those questions. Obviously this is something new to all of us something but thank God, we've never had to do before.
And so what we're looking forward as any indication of demand in markets, where the debts.
Indication of transients or or groups will show up short term. So the real question that becomes at what point do we opened.
To us it's once we can open up safely and once we have those protocols in place that we can actually handle.
Folks our guests safely our associates safely told us as it safely I should say.
And at the same time not lose more money than we're currently already burden.
So.
A lot of questions on the table our asset management team is working diligently and I will tell you will get another shout out to our operators who are working with far fewer people.
To try and answer all of those questions in a very very fluid and dynamic situation.
So the good news Lucas and boy, we are we're looking for good news. These days, but we think we have we found it.
Different spots. The good news is we have maintained executive teams.
Engineering staff HR professionals sales professionals on property and so our ability to turn these hotels backed off which will be a fantastic day.
But the ability to turn these hotels back on will probably take us depending on the hotel three days to seven days.
Depending on the complexity of that until.
Great. That's that's really helpful color.
And then just the turn to values I'm just curious if something's done we're looking for acquisitions today, what discount would you or acquire compared to where values were a few months ago.
Great question. Unfortunately, I don't have a great probably agree to answer other what we're seeing right. Now is just tidbits of information and as you would anticipate in a period of this level of dislocation there is going to be a significant bid ask spread we have heard of.
And had been in contact with certain folks that are looking for liquidity in need liquidity.
Don't have the resources to get through something like this with cash burn rates or might not have institutional backing.
And.
They have been looking for discounts of 10, maybe 20%.
As a seller.
I think buyers are looking for something if you have cash right now and you have liquidity I think buyers are looking for something far wider than that.
I'm hearing 25, 30, 35 or more percent down from what we would anticipate the.
The value to be prior to covert 19, now obviously that is all going to change in this very fluid situation as we have a.
Better handle on on what's happening with the virus, what's happening with travel.
What the debt markets do et cetera, et cetera. So again that is simply a spot market now and I would anticipate that to change.
If I'm right on those numbers I would anticipate that to change meaningfully over time.
This is not great really on the summer hotels.
Right and then maybe just one final one kind of bigger picture theoretical.
As people get more comfortable with working from home and are all doing virtual meetings.
Yeah. The obvious question comes up we'll lodging demand business transient et cetera, all be impacted in the long term I'm just curious what your thoughts on that.
Oh, I don't think so Lucas I really don't I think if.
Hi, there is a from what I see I think that there's a norm as pent up demand for people to get out of their homes.
And to go do something fun and to congregate.
I have been on.
Hundreds and hundreds and hundreds of conference calls some calls go to meetings et cetera, et cetera, and I will tell you I cannot wait to get on an airplane and I Love My family taken with me, but I cannot wait to get out of my House and I think there are a lot of people like that business is best on phase.
The phase now will there be systematic changes because of this of course.
Do I expect that to have a material long term impact on our business I do not.
So I can't think to get back.
Because it will be spectacular.
No now but Karen.
Yes, there on take our next question from Anthony Powell with Barclays.
Hi, good morning.
Yes, I'm a question on why a lay a it's obviously a leisure market, Hawaii generally black flag to market, what's the thought process from the story there about a real beating and when do you think you may start to see.
Travelers in there.
Yes, so the Hawaii in general has been shut down.
There is effectively a quarantine for anybody traveling to Hawaii to effectively shelter in place for 14 days.
So as a result of that air traffic directly to Maui has been effectively completely curtailed in frac flights are coming in from allahu.
So we would anticipate did through this until local health authorities.
Lift that and feel more comfortable did that demand there or excuse me that occupancy there will remain hotels will remain Sean.
Having that said in his one of our data points that shows there is significant pent up demand for leisure traffic.
The inquiries the reservations for the fourth quarter for wireless or off the charts.
And again I do think that people want to get back it will really just come down to when people can safely travel again, we working with other hotel owners are in communication with the airlines to try and coordinate that and so while I don't have an answer of those specific date for you right now.
Feel good about once this once time passes and perhaps get lucky break in some of the restrictions lift.
That way I lay it will be justified.
Got it thanks, a lot about capital allocation.
You bought back stock really in quarter extended that how do you view.
Buying back stock versus buying hotels that are out there kind of going to try and environment.
You may have already seem a lot to stop so.
Are there better option now out there and I will tell market and.
Looking what that really if you can really thinking about buying hotel that once you get passed that.
We can mimic crisis can you be buying we'll talk later this year that too early.
What kind of the timeline here.
So a couple of questions in there how do we feel about buying back stock right now, we've we've suspended our stock repurchase not not out of a desire.
Or lack of desire to do so, but really just on shoring up our balance sheets and getting through our covenant amendments with our capital partners.
The real question will be is when do we come off of that covenant holiday in what's available to us at that point I do expect to have some flexibility in terms of capital allocation, which we can't go into the details of now but expect to once we get through this covenant waiver I do expect to have some flexibility.
But a portion of can't go into details of that right now.
In terms of.
What's available or how do we weigh share repurchase.
Versus acquiring assets still little bit too early on that Anthony there's really not a robust markets for acquisitions as we stand here today.
Or a real sense of the exactly where pricing is as I had mentioned, but lucas's comments.
Got it and if you get the covenant waiver could you be in the market for acquisitions.
Quarter first quarter next year Whats neat early as you think you can get back into the market.
Yeah.
Good morning, Anthony it's Brian.
Yes.
We don't have obviously, we don't have the waiver in place yet so let me talk generally about the structure and what that what that would look like in men base. It off what we've seen the market in the there tends to be a basic construct and that has standardize the material terms of waivers for.
Look like and companies will look like right now.
So you should expect from the ones you've seen so far.
For most of them to share a lot of those those characteristics and then based on the specific leverage of.
Each company wide would their daily Beast specific nuances to each one the more levered companies, obviously would have heavier restrictions and more more restrictions on mandatory prepayments restrictions on acquisitions capital investment, yeah, limiting dividends or or <unk>.
Our repurchase offset so that would be for the must leverage for the company is that went into this with lower leverage you should expect more breathing room when it comes to capital when it comes to acquiring assets, you're not going to have.
The ability to do whatever you want but you will have add there should be some some easing of restrictions that would allow for buckets of investment.
And so.
Again, we said that.
Our expectation is that we over the coming weeks, we will will be to a point I think you saw one filed today.
My guess is that the majority of companies will have them rolling out over the near term and when you. When you look at this waiver period in you look at the restrictions and.
The other thing you need to think of is is when we all come out of this and that the other side of the of the this relief period and once we have a cleaner TWIC trailing 12 to too.
Calculate our covenants off of.
Just because you have a covenant waiver doesn't mean that when you come out on the other side. Your leverage is is in an area, that's conducive to acquiring or or we're allocating capital.
Remember that we built the balance sheet. So we could we could handle major downturns in.
You are to take a 50% decline John talked about earlier at the end of the today, we would be.
Between three and a half four times levered at that point.
Which would give us the ability to.
To do a lot of things others may.
That 50% decline, even though you get through this waiver period, others may come out of this they could have leverage as high as six to 10 times, which is quite restrictive so I think that.
To answer your question during during that Covenant waiver period, we shouldn't expect to have some flexibility, but more importantly, when we come out of this we think we will have.
Significantly more more options than than many of our peers.
Thank you.
Well now take our next question, Sean Kelly with Bank of America.
Hi, good morning out there guys and John Yeah, why last sounds probably pretty good to many of us on the on the call right now.
So I just was hoping you could comment a little bit further you Brian on the clarity on what you just gave was important so maybe just to be please super clear on it.
There's basically both restriction during the covenant waiver period, and then obviously, what what the whole situation look like afterwards.
The restriction during the waiver period on tons down to be lower I. Appreciate you can't get interested that explains that is that part of the crux here is that you should have a little bit more flex and possibly some uh huh.
I'll give you restricted payments, but there might be more flex and what you can do earlier than than most.
Good morning, Sean while I can't get into the specifics I would speak speaking generally to credit.
Our credit and some of their some of our peers that have credit that's comparable to ours.
Those that have the lower levered balance sheets are superior credits and should.
That should warrant.
Flexibility that does that are more highly levered.
Well, most likely not half.
I think thats is probably is specific to that as I can be right now.
Understood appreciate that and then.
The other kind of question.
I had is I think going back to Anthony is on sorta at that.
On the fly to piece for Hawaii, That's obviously, a really really important.
Market for Soundscan.
Just if you've been in dialogue at all with.
In particular with.
So the airlines and on.
Thinking about how they are going to work with reopening.
Pasadena Q market like it outwear interestingly it could be outsized demand on on.
On that leisure traveler, there as well, especially relative to what we're going to see where the air travel elsewhere and just how are they thinking about it if you have.
Oh, So I think the question is.
Have we been in dialogue with with folks in the broader tourism industry of restarting in the answer is yes in general with other hotel owners.
Very early conversations with transportation as well so in just how we're going to get.
The island's restarted.
Hey, just any color you can provide John and how it looks are just too early on in flight schedules and things like that.
Two too early to tell I will tell you that the only thing I actually can point to it. It's just too early for specifics on that.
But the only thing we can really point to is just the reservation volume coming in and looking for looking for.
Reservations, particularly in the fourth quarter.
Got it and last question for me it would just be on the on the cash burn figure. So first of all thank you for all the detail on that.
As we start to kind of think about these numbers and differences by operator.
Especially that let's call it the hotel level.
Yeah, I think John you made a really clear that you're choosing.
Deliberately to invest in certain areas. The hotel DC because you can on is it's a big part of the difference as you think as you think about right now probably in that sales piece in keeping that that that ongoing relationship going that probably the biggest primary difference as we like to me. The other is as we think about some.
These line items in anything anything else that you think might might drive that difference.
Well from what we can tell its number of executives executive time, and then also number salespeople. There are there are a few others that are taking the same path that we are it's our understanding but.
I would say that there are others that are not and some have taken a lock the front door mentality.
Because quite honestly they can't afford it and.
They're looking for every dollar of liquidity that they can get right now, but there's not many folks.
That can sustain.
$30 million of months for portfolio for example, like cars or take it down and say you owned a couple of hotels and instead of 30 lets say, who was two or $3 million.
Certain owners that just can't sustain that and they are cutting everywhere. They can.
And where I think that that will eventually manifest itself is how long does it take the property to reopen.
Does it reopens.
You can it be nimble enough to make the changes to be the safest hotel you did the safest hotel possible to the traveling public into the meeting planners.
What does your.
What does your sales look like.
[music].
In future periods, how have you treated that group customer.
So.
These are all decisions that you can't see from a burn rate, but are important for the longevity of the assets, we own a florida have $5 billion portfolio of assets, having rate engineers on property protect those assets, having the right security around those building to protect those assets Youre investments.
Really important.
So that has been our focus I do know just having listened to a couple other calls that a few other of our peers share. This view and have done the exact same thing.
My understanding is many have not.
Thank you very much.
Well now take our next question from Chris <unk> with.
With Deutsche Bank.
Hey, good morning, guys.
Hey, John and Brian you, guys, Hey morning, you I've seen a couple of cycles and there are all different in their own right but.
The one thing we always think about is what does pricing look like on the other side and certainly not asking you for a number but do you see do you think directionally. The same thing is going to hold through this time, where we build occupancy it takes a lot longer for rates come back and how do you think distribution and loyalty plays into that.
And I guess the question is really also do you expect there to be enough.
Maybe property closures that that rates come back a little bit faster than than they have in the past.
Very very early days Chris.
I think some of it will be dependent on where is there a vaccine word water therapies look like whats. It will there be a near term aversion to traveling to gathering to congregating et cetera.
Long term is I think I was saying earlier I don't anticipate any material.
Reduction in demand because of this.
I think long term. The this industry has proven time and time again to be incredibly resilient and always in each cycle reached new highs.
The trajectory of coming out of this I don't yet, though I think it's probably safe to say that with the amount of unemployment. We currently have that the economy is going to be on rocky footing and with a bunch of companies just like ours that have been knocked back a bit that business investment et cetera.
Likely to take a pause.
Does that lead to a temporary.
Lower occupancy is ramping occupancy and reduced rates I think thats, a very fair assumption.
The good news is as we've been talking about is we've we've we're prepared for that we're we're set up to take.
We've always said, we're set up to take a 50% decline and same store you to do something that up until this point has never happened before Tibet degree and still have offensive capabilities.
So if that is the case on hoping for something better.
We have a large portfolio had left with nothing more to have revpar higher than where we were in 2019.
But in that event that we do come out of this in some level of recession.
I think we're really well position.
Okay very good and then.
One assay on the on the group side.
None of US know, how what some of the restrictions are gonna be or how long they are going to they're going to last but what do you guys think is it possible to make investments that you know might make smaller group meetings possible. If this thing rules continue and how much of an investment do you want to make in Reconfiguring.
Space for the idea this can be with us for a few years versus the idea that it might not be with us BP months from now.
I think it's on a case by case basis, I mean look we're we're accelerating certain investments and some of our group hotels.
Our Renaissance Orlando, we've been waiting to do the atrium.
Big Beautiful atrium, which has a lot of meeting space.
Basically feeds space.
That we've been waiting to do the flooring underpinning of that building for quite some time.
Our general manager Bob down there cannot wait to have that dundon, it's but it'd be so disruptive tearing all that stuff up that it'd be a lot of displacement.
In the building and so well hotels, partly suspended operations, there's no better time for the present, if we believe that there was going to be a long term.
Impairment two groups that want to.
Experience at hotel, we probably wouldn't do it but that's not our view and for a couple of extra million Bucks, we decided to accelerate the same thing in.
If the Renaissance DC.
Fully anticipate that group will come back it might be slow for a bit and we might and were very likely going to have to implement all of these procedures for social distancing and make sure that the hotel associates and guests are safe.
And going back to hotel like Orlando, we added a significant amount of meeting space there.
And so we could easily handle.
Smaller groups, because we have so much space there so.
Don't know if that answered your question, but a couple of things and think about.
Yes, yes, no for sure I appreciate that thanks Ron.
Thanks, Chris.
Well now kind of question from me Rose with Citi.
Hi, Thanks.
John you mentioned that operating paradigms have to kind of be changed significantly and I'm, just wondering kind of as the.
Businesses are your properties reopened.
Let me deal to do you think labor costs go down as a percentage of revenue I'm kind of post covert world or stay the same or go out with extra protocols that might be in place.
Yeah, well Theres a lot that goes into it and depends also how you look at it so.
If you say as a percentage of revenues well that will also depend on what revenue levels look like.
There will close that might have not had been the best measure that I got some sort of on a same store basis.
Absolute costs I guess.
Maybe think about it that way.
Look I think theres going to be incremental costs of making sure that the health and safety standards are implemented.
Once once we know those and Theres lot of people are working very diligently.
On on coming up with those standards you have to remember we are a high touch business.
Our business prides itself on the service guest interaction.
And this is going to be.
A.
This is going to be a new paradigm, it's going to be in the in the interim it's going to be.
There will be some challenges, but again, there's a lot of really smart people working on these things.
Too early for all of the details.
But from that standpoint, I think there'll be some incremental costs.
But there's other.
There is other services that we look at what we say is this an opportunity to re look at how we do things at the property and above property to become more efficient.
And.
It was a quarter or two ago and I forgot who asked the question, but somebody on the call said is there any way that you can revamp the paradigm effectively.
In operations, and I said, no not yet because even in a flat revpar environment Theres just.
Theres too much inertia to get these changes well.
This is a different environment.
14 of our 20 hotels closed this is a different environment.
So a lot of these questions are being asked not only by hotel ownership groups, but also by by operators.
So, we'll see where it goes.
Okay. Thanks appreciate it.
Thanks Mitch.
Well take our next question from Michael audio with Baird.
Good morning, everyone.
Hey, Michael.
I just want go back to the Hilton Times square.
Clarify that.
Yes.
And your plan right now to hand, the feedback to the lender all else equal assuming current condition persists.
Hi, Good morning, Michael It's Brian.
Yes.
In addition to what we hear.
Okay.
I can't say a lot more than what weve disclosed on on the cost so far better, but let me recap that is that given the current conditions of the hotel.
Again, we are anticipating Italy's $6 million to $8 million of EBITDA this year and with the uncertainty of.
The ground rent piece at the tax reset all these other items at this moment, we are working with the special service there are on the options, which well which could include.
Receiving going into effect, if if a receiver goes in to effect there than the.
The conclusion of that would be some sort of.
Consensual foreclosure or are there other item said that that is that has the potential outcome. If that it's the receiver goes in.
At this time.
That's that's where we are on this.
Got it now are you guys funding debt service today, and do you plan to fund that shortfall between.
Now in November how should we think about that.
We were not too.
We did not make the.
The first debt service.
Got it and then just maybe thinking a little bit further out to the Renaissance DC loan.
How are you guys thinking about addressing that and then.
Does your month of liquidity include potentially paying.
That hundred plus million dollar loan off if that's what needs to happen in the spring next year.
We are with that maturity so.
It's a little too early at this 0.2 to start that talks with the lender on it is a lender we've had a long long relationship with.
And so.
I think there are options there.
Given the current environment.
The.
Yes.
Able to extend things is definitely on the table these days.
So that's something we can look at at the end of the day, if we are unable.
We definitely have have liquidity to to address situations again Hilton times square is a very unique situation, where just the confluence of several.
Value destructive items that are all happening at the same time makes it makes it unique in difficult.
Any out of there.
Look where were.
We're having to support all of our mortgage hotels right now.
So that's something you continue to do and.
We feel we feel good about being able to workout a good solution.
DC.
Got it that that's helpful and just to clarify, though that 100 plus million dollar does not inclusive included in your cash burn or at least month of liquidity analysis.
No I know liquidity analysis.
Yes, the ongoing debt services, the ongoing debt service payments are but not the not a final pay off.
Got it understood.
Thanks for that.
Well take our next question from Stephen Grambling Goldman Sachs.
Hi, Thanks.
The opening remarks, I think you mentioned as you're thinking about the markets potentially seeing some small owners that could come to market on the back end of this generally anticipated hotels that will hit the market could fit the criteria of what you would want it pursue and then maybe more broadly are the things that on the back end of this you're thinking about.
Now trying to reposition your portfolio around as it relates to dispositions or acquisitions. Thanks.
Sure I.
I think I got the question.
We anticipate that there would be opportunities to acquire assets that fit our strategy I believe is a question.
Too early to tell immediately or maybe we were an early days of it.
Eventually, yes, I do think that there will be assets that fit our strategy of long term relevant real estate.
There are a bit assets that had been acquired recently or later in this past cycle.
That.
Might eventually need to find home, but again. This is these are early days.
Do we want to continue to capital allocation and dispose of hotels, yes, as as we've talked about on previous calls are still probably a small handful of hotels that do not fit our strategy that we would eventually like to sell we.
We have no pressure to sell those hotels.
We have.
No desire to give them away.
We are comfortable with the hotels.
And we have again, we have lasting power that we're not forced to raise liquidity right now so while there's still a few number of hotels adult at that strategy more hotels under our value so to speak.
We will be patient.
Great and then maybe an unrelated question as you.
Look to reopen properties are there generally working capital either kind of almost.
Opening type expenses that we should be thinking about.
That could put some pressure on margins or cash flow relative to either the burn rate you're referencing are just thinking through that ramp back. Thanks.
Yeah, not really not really.
You know, obviously, there's going to be some restocking of certain supplies will be some.
Some expenses and just pulling people back et cetera et cetera, but.
It will be.
No I don't see anything material, but I would I would think about modeling.
Great. Thanks, so much.
Thanks Steven.
Well take our next question from David Katz with Jefferies.
Hi, gentlemen, thanks for taking my question I appreciate it.
Hi, there have you.
Hi.
Good to hear everyone's voices.
And obviously would be.
Much nicer in person.
Yes.
Have you.
Sort of laid out.
Portfolio wide, just so we can sanity check ourselves, where a kind of EBITDA Ari breakeven.
Occupancy or revpar level.
Yes.
Yeah, we have done a little bit of work on that by the way. This is this this analysis I ever thought we would have to do.
But I'd say, they're doing it.
Well the obvious reasons, we're doing it and the we believe the answer is with a whole bunch of variables. We believed that the at the answer is somewhere between 35 in 45% occupancy tolls.
Most of tells would breakeven that assumes.
That 80 ours lower that assumes some incremental costs et cetera, et cetera. There are a whole bunch of variables and then we could be off fairly meaningfully.
Couple of hotels, maybe some of the larger group hotels, a hotel like why Atlanta, the occupancy is probably five points higher than that so say.
We would call it 40.
40 to 50 occupancy.
Again with a whole bunch of variables.
Right.
So.
Yes that number do I will tell you David that number is.
A lot lower that occupancy level is a lot lower.
And what we would have estimated.
Six months ago.
And again, what we've seen from the operators is a significant reduction.
Property level costs.
And above property push downs in expenses et cetera et cetera.
So on one hand.
It's it's good news, because we're losing less money, but again I have to point out that the human told this.
He is significant.
One of the key reasons, we're focusing so hard on trying to get back to normal. So we can get people back to work.
Understood and if I can just sort of lay out one final topic conceptually because you're usually very thoughtful about these things.
We observed full service properties in general.
Cutting back on things like full time restaurants, and other kinds of services.
Enhance the value and the earning capacity of an asset, but but impact profitability generally speaking.
Is there somewhat of a shifting paradigm, where higher higher and higher end hotels offer less and less in terms of those kinds of services directly where.
The services are limited, even you know at higher price hotels, and whether something like that you know endures overtime.
Really depends it really depends on the hotel David.
I would think.
Certain hotels.
Are going to require that that.
Significant services and amenities others.
I think they have been forced to offer the those services that amenities because of a brand standard but quite honestly.
Might be in the antiquated thought and right.
So what we said it is.
Earlier was.
This is the time to reevaluate those paradigms and see what the consumer actually Watson will pay for.
And so while we have a lot of thoughts right now, it's really too premature to share those share those views, but we are having those conversations with our operators and.
One thing I really appreciate about our operators right now is they are open to those discussions.
All right.
Sure they are.
Thank you for that and the safe and good luck.
You as well thank you.
Well take our next question.
Bill Crow with Raymond James.
Hey, good morning up there guys.
Hey, Bill on you.
You mentioned advanced reservation, and looking out towards the end of the year and getting some activity. There 30, evidenced that consumers. The guests are responding to discounting or is it just.
Those who feel safer willing to pay up for it is there any sensitivity there.
Well that's a that's a great question I just don't have that information at my fingertips.
I think there will be discounting as.
The more commodity type assets I do think there will be discounting.
And even as operators find out you know for example, there was a couple of resorts here opened in southern California on a limited basis over the past couple of weekends that put.
30, 40, 50% of their rooms out available.
And a lot of them sold out pretty quickly now some of those rates were.
We're we're okay. They weren't great the work fantastic, but they were testing the market and also testing operations.
And so.
I do believe that as we opened up there will be some discounting.
But I can also see evidence and not necessarily from hotels, but also from the golf courses that are reopening add other leisure amenities.
I think there's pent up demand.
For a lot of these things as Im sure. Many of you right now are sitting in your basement. Your garage your living room your dining room table.
Et cetera, and are very much looking forward to the David you can go out and enjoy again and that's what we're seeing.
Where that old rubs, where that all runs out of it quite yet.
All right next quickie here.
You took over kind of midway through the through the.
Current cycle.
And when we come out of this we're obviously going to be at day, one year one of whatever the next cycle brings to set does that change your risk appetite at all knowing that we're at the at the start.
But no I think it's the same playbook that we've laid out.
We were very acquisitive early on in the last cycle.
But we pulled that back pretty meaningfully.
And one acquisition over a four or five year period, numerous dispositions over that period.
Had lots of conversations with everybody on the phone about our methodology of underwriting hotels and building in cycles.
Bill we didn't see this comment.
No but.
If our if our fundamental view.
Is that long term things have not changed your short term should have changed long term things have not changed.
I don't know necessarily our risk profile has increased but I could see us being a rope was put it this way.
We are far more interested in acquisitions now than we were six months ago. Yes. That's that's great. That's that's the answer I think one more.
[music].
Go ahead I'm sorry go ahead.
I was just I know, we got a lot more things to think about but but eventually it seems that local governments are going to need.
To get some money somewhere and I'm, just wondering about property taxes occupancy taxes I mean, it Oh was has been in elections had a target announced back in it just feels like.
It's going to be a bigger headwind going forward is that is that something you all thought about.
Thought about I don't know where it ends up.
You know with property values going down I think that there will be somewhat of an offset there, but I do believe to municipalities states local governments will be looking for more.
More and more revenues as their coffers are being depleted currently.
You know labor I.
I think that there's going to be a significant conversation about folks that don't provide health care benefits.
And.
Whether they should.
And the good news is as we provide those benefits in fact, I think were very good employer.
Or operators are very good employers.
But I think there this is going to shake up the world in many different ways.
But then again nobody is called in here to listen to what I have to say about that so.
I will stop talking.
Right well this and John I always appreciate your insight.
Thanks Bill.
Well take our next question from Patrick It sounds like sometimes.
Hi, good morning.
Just a quick question for you on how Ah, we should think about.
Your Capex for this year I think the prior guidance with 65 to 85, and you've talked about some not essential capital improvements.
Deferred.
Can you put a dollar amount around does not a central capital improvements and then any high level color on how we think about those.
Charles getting pushed into next year or are they or they are.
Permanently deferred thank you.
Good afternoon, Patrick it's Brian the idea the initial guidance for the earlier this year was 65 to 85.
We are our new.
Guidance for Capex based on about a 30 $35 million decline in that by Jed New guidance is call. It.
35, 45 million and then on top and that John John mentioned, a few new projects that were accelerated based on.
Being able to get them completed.
And not.
Not having the displacement that and that we would have normally expected there.
For the items the items that we had in for this year are all one one was the Portland hotel renovation that was ongoing and started last year and so that that was at a good piece of of the forecast for this year.
Others are any any important systems or or or infrastructure at the hotels that needed to be down or was it was their time to be done.
Those does we are not deferring we're keeping.
The facades that need to be done the elevators that need good time that stuff is getting completed some stuff, we pushed off or more of the and the things that can wait you know 12 18 months.
The refreshes of lobby restaurant furniture, Jim equipment that sort of thing.
So that can be that can be deferred into next year. The following year.
It all depends on on what the recovery looks like and how fast.
Those items get be scheduled.
And then as we get into next year, we'll go through the same as everyone else will go through the same exercise.
Yeah, I think given given our position and provide here assuming that things continue to get we see improvements.
Larger rooms renovations are renovations that have displacement associated with them will most likely get the.
Preference early on.
Due to our ability to not experienced that displacement so.
The next year will be a moving target but nine.
Especially since the amount of capital we have put into our portfolio over the over the years. The things that are getting deferred are one not permanently cancel their permanently deferred and but we have we have some flexibility and when we can begin slot. This bakken.
Okay. Thank you.
That does conclude todays.
Question and answer question I'd like to turn the conference back over to Mr. Arabia for any additional for closing remarks.
Wonderful. Thank you Ana and thank you everybody again for joining us today.
Stay safe say healthy and we look forward to seeing you and better days. Thanks, everybody.
Yes.
And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
[music].