Q1 2020 Earnings Call
Ladies and gentlemen, please standby your conference call will be getting momentarily once again, ladies and gentlemen, thanks for calling please remember your line is your conference call will begin Charlie Thank you.
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I would now like to have accomplished over to your hosted by Mr., Adam Yes, Sir please begin.
Thank you Howard and good morning.
Joined today by Summit Hotel properties, Chairman, President and Chief Executive Officer, Dan Hansen.
Executive Vice President and Chief Financial Officer Johnston.
We know that many of our comments today are considered forward looking statements as defined by federal Securities laws.
These statements are subject to risks and uncertainties, both known and unknown as described in our 2019 form 10-K in other ASCII filings.
Forward looking statement that we make today, our effective only as of today May 12, 2020, and we undertake no duty to update them later.
You can find copies of our S. You see filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call on our website at www dot that's each be read dotcom.
Welcome someone who tell properties, chairman, President and Chief Executive Officer, Dan Hansen.
Thanks, Adam and thank you all for joining us today for our first quarter 2020 earnings conference call.
Yesterday, we reported first quarter results in our press release, including all standard comparable operating measures and financial metrics, which has been rendered largely irrelevant by the dramatic falloff in demand we saw in the middle of.
As widespread closures were implemented to slow the spread of the cobot 19 buyers.
Therefore, we're going to spend our time today reinforcing the many proactive measures we took to combat the effects of the virus on our business provide an update on the current operating environment balance sheet and look ahead to how we envision leading in the future.
Over the past two very challenging months, we have prioritized the health and safety of our guests our brand and management company associates, and our own employees and I'm quite pleased with the resolved demonstrated by our team managing through this unprecedented crisis.
We have been fortunate to speak with many of you in recent weeks and are genuinely grateful for both the concern for wellbeing and the interest in our business.
As the depth of what is certain to be a historic downturn became apparent in March we swiftly began implementing hotel level contingency plans focused on rightsizing staffing levels and adjusting service amenity offerings to an exceptionally low occupancy environment.
Fortunately the official nature of our operating model has allowed us to keep all but six of our 72 hotels open with another nine hotels effectively consolidated into adjacent typically dual branded hotels.
The hotels that remain open our operating with very limited staff and providing only the very basic service and amenity offerings.
We have suspended all non essential capital expenditures for the remainder of the year, along with common dividend distributions, which combined will preserve over $100 million of cash on an annualized basis.
We have also taken additional measures at the corporate office implementing temporary base salary reductions for the majority of our employees and Furloughing approximately 25% of the staff.
We were very pleased to announce yesterday, an amendment to our senior bank credit facilities, John will provide more details on the agreement shortly but this amendment provides us with an additional $150 million of Undrawn funding capacity.
A full financial covenant waiver for 12 months and a modified covenant package beyond those initial 12 months that creates considerable flexibility and runway for our business to recover.
As I mentioned the majority of our hotels remain open today and despite the incredibly challenging conditions. We are pleased to have found some level of stabilization over last few weeks.
Preliminary <unk> results for our portfolio point to Revpar declining approximately 89% compared to last year, including results from hotels that were closed or consolidated during the month.
However, occupancy levels were four full percentage points higher in the second half of them as compared to the first as certain brand initiatives, including first responder rate programs and our own internal revenue management strategies prove successful in capitalizing on the limited opportunities.
While high teens occupancy levels may seem trivial I'll remind you that even with 90% year over year Revpar declines that marginal incremental revenue. It reduces our monthly estimated cash burn rate from $15 million to $11 million per month.
Nearly $300 million of current liquidity, we have well over two years of capital chairs five a very draconian and thankfully highly unlikely operating scenario.
While we are all facing what is undoubtedly an uncertain future and road to recovery. We also believe this will ultimately provide unique opportunities for value creation.
Generally share in the emerging consensus that leisure travel broadly and drive to leisure demand more specifically will be the first in faster segments of business to recover.
We stand well positioned to benefit from such recovery as are efficient operating model has afforded us important flexibility to remain open at the vast majority of our hotels and a clear pathway to relatively quick re ramp of business.
Approximately 50% of our pre crisis business mix was leisure oriented.
Group business, particularly large groups in international demand make up a disproportionately small portion of our customer base.
Before I turn the call over to John I would like to make a few comments about our brand partners and provide some examples of how they have responded in a constructive manner.
As you are probably well aware of the major brand companies have implemented several measures to help support owners to the crisis, including the postpone postponement of brand mandated capital plans access to and utilization of FF any reserve funds for operating expenses fee relief and the suspension of some brand standards and quality control audits.
More importantly, we have collaboratively begun the very important process of addressing the future operating standards of our business.
One in which cleanliness hygiene and sanitation will undoubtedly take on a more prominent role.
Our belief is a watershed event like this gives us a rare opportunity to address meaningful shortcomings and implemented important changes to the day to day operations of our hotels.
Well, we are in the very early stages of redefining our model, we remain committed to finding solution that enhance the long term profitability of our hotels and delivering on guest evolving and likely elevated expectations.
With that I will turn the call over to John scanner, our CFO.
Thanks, Dan and good morning, everyone.
In yesterday's press release, we outlined critical amendments to approximately $1.1 billion of debt, which includes our 600 million dollar senior credit facility as well as to 225 million dollar term loan facilities.
At are governed by the same set of financial covenants and us were modified and essentially identical ways.
Importantly, these amendments allow for the outright waiver of testing of financial covenants through the first quarter of 2021 and modified covenant threshold, along with annualized testing mechanisms in the last three quarters of 2021 to accommodate what may be more gradual recovery in our business.
We've been ability to draw an additional $150 million under the revised terms under our revolving credit facility, giving us nearly $300 million, a total liquidity, including approximately $145 million of unrestricted cash currently on hand.
This gives us not only considerable capacity to survive an extended period generating extremely limited revenue, but flexibility to operate in a potentially longer downturn and slower recovery scenario.
We also broadly preserved our ability to continue making preferred dividend payments and retain flexibility to renovate hotels in a manner more consistent with our past cadence once demand begins trending toward normalized levels.
In consideration for this flexibility the credit facilities are now secured with pledges of equity from our borrowing base assets and includes certain restrictions on uses of cash during the waiver period, including investments common dividend distributions and share repurchases.
The amendments to these facilities address more than 80% of our current debt balance and when combined with an absence of debt maturities until November of 2022.
Position, our balance sheet, well to withstand the financial ramifications of a severe decline in revenues.
Today, our weighted average interest rate is 3.4% and weighted average turned to maturity of nearly four years.
We are truly grateful for the support we received from our bank group and proud that our many strong relationships allowed us to work through this process efficiently and successfully.
As Dan mentioned, our cash burn rate in a zero revenue scenario is approximately $15 million per month, which is split roughly evenly between covering operating losses at the hotel level and funding corporate cash needs, including all principal and interest payments corporate DNA preferred dividends and non discretionary capital expenditures.
We've seen an encouraging stabilization and occupancy levels in recent weeks, which is reducing our cash burn rate by over 25% and in turn adding considerable runway to our liquidity profile even in this historically low demand environment.
As our attention toward an increasingly towards a recovery in demand and evaluating reopening. The few hotels that are currently closed we remain focused on adding back labor services and amenities gradually and prudently.
Less than 10% of the total rooms in our portfolio our close today and the majority of those we're planning to reopen over the next 30 days pending any further changes to local market conditions.
Thankfully our operating model has always relied on relatively less labor and we believe there's an opportunity at a minimum on an interim basis to operate with fewer ft east at more normalized occupancy levels.
While revenues have declined dramatically across the industry. We have continued to gain market share. Despite the lack of traditional demand.
Even before we began to feel the effects of Rod travel restrictions, we improved our Revpar index by nearly 300 basis points in both January and February.
Our 7.6% Revpar index gain in March is likely somewhat skewed by hotel closures in certain markets, but nonetheless, we have been successful capitalizing on opportunities that currently exist.
Speaks highly of our revenue management team and augurs, well for our ability to re ramp quickly.
Finally, we formally with through full year guidance ranges in the middle of March in response to the Cowen 19 pen down and given the continued uncertainty in our business. We're not in a position to provide updated ranges for the remainder of the year.
We will evaluate reinstating guidance as the operating environment continues to evolve over the coming month headquarters.
That I'll turn the call back over to Dan.
Thanks, John.
In summary, we are pleased with our business model or partnerships and our process to mitigate losses and prepare for the future and with that we'll open the call your questions.
Ladies and gentlemen, as a reminder to ask your question you would need to press Star then one of your telephone keypad. If you wish to redraw. Your question. Please press the pound.
Please standby, where we can probably Q any roster.
Our first question or comment comes from the line of Chris Woronka from Deutsche Bank. Your line is open.
Hey, good morning, guys.
What do you guys have an estimate of maybe what percentage of the portfolio.
Drive to fly through I know, it's not something you typically as guests, but if you look at dislocation of those hotels or any way to ballpark.
Chris This is Dan.
It's a little hard to.
Good to accurate estimate I mean technically all of our hotels you can drive to as as most of you can.
I think what we see as some of the more traditional.
Locations that maybe haven't been as.
Much of a drive to market are starting to see some pickup as people may be looking at different modes of transportation and they may be modifying their plans instead of flying somewhere to go somewhere where they can drive to and that drive to market.
May have previously done a fly to market. So as we look at it.
We think that all all of our markets have components that.
Our business visible.
And this recovery.
Good.
No it doesn't specifically answer your percentage question.
But it's really there's not a real specific metric that we get through our gas that we could use.
Yeah, Yeah, no fair enough.
I also want to ask you about.
Kind of how you see rate integrity unfolding going forward, maybe if you look out to July or August because I think we know that some of the bigger full service boxes might have higher breakeven occupancy they have to use rate pool are you seeing any signs of.
More severe rate erosion as you look further out or is it so far holding up pretty well.
I think so far it's held up all right in light of the circumstances were sitting and.
You know.
Forward looking trends are really hard to have any sort of confidence and at this point I'm not sure how reliable.
Demand forecasts are out beyond the next 30 days, so I think where Weve line up is that we expect to compete very well.
With our hotels in our intermediate area, whether they're in our comp set or not.
The factors that we've been really positive on our portfolio for the last several years, which has their grey box has a great locations.
They have an average effective age of a little over three years they've been renovated.
And I think that we believe will help us manage rate as best as possible.
Okay very good thanks, Dan.
Thanks, Chris.
Thank you our next question or comment comes from the line of Michael So sorry, Oh from Baird. Your line is open.
Good morning, everyone.
Morning.
Just wanted to dig into March and April trends, a little bit really a better understand the revpar declines can you maybe give us a sense of how.
Urban versus suburban properties fair and then any particular markets that.
Dragged down the overall portfolio's performance for the helpful.
Yeah, Hey, Mike, It's John I would say March finished down for the fourth portfolio about 60% as you would imagine that you know I think we started to feel the effects than some of the urban markets.
More quickly than we did in suburban markets, you know San Francisco probably being.
The one market that stood out where we saw a more oh quicker decline earlier I.
I think the trends and Dan mentioned, a little this in the prepared remarks, I think the trends in April, which where our hope will be kind of the worst funds were worse in the first half of the month than they were in the second half of the month. The occupancy was a full four percentage points higher in the second half of April than it was in the first in the first half of April again, I think generally I would say.
The suburban portfolio outperformed the urban portfolio and we've seen a continuation of that have that trend and slightly higher occupancy levels as we got into the first few weeks of Matt.
Got it and can you tell us the six hotels that are closed already currently.
Sure Mike It's Dan.
We've got that Hampton Inn, and suites and silverthorn.
Hyatt place Minneapolis downtown.
The Hyatt place and Orlando The Convention Center.
And the Hampton Inn suites, Baltimore Inner Harbor.
Pardon Express San Francisco.
And the hotel Indigo Nashville.
Got it helpful. And then just last one for me probably for John You mentioned, a 150 million availability.
What are the requirements for you to get that last $50 million. It looks like there is 100 million that's kind of freely available and then there's a couple more steps you have to take to get to that last $50 million can you walk us through the mechanics of that.
Yeah sure so the.
I think as we've laid out we drew a $125 million of cash up and right around quarter end. So we're sitting on $145 million of cash today.
Addition to that we preserved $150 million of incremental borrowing capacity under the facility. The first hundred million dollars. It will be secured by pledges of equity on of the borrowing base assets in the last $50 million of availability gets secured by outright mortgages on those borrowing base asset.
Got it so if you wanted but.
Whatever reason you found a use for that $50 million you'd have to go through the process, that's a little bit more work to get that it's not as.
Got it easy and efficient to get the.
Compared to first paranoid right, yes, that's right I mean, I think the rationale for US was one I think for the banks. It's obviously a significant credit enhancement in our view between the $145 million, we have today and in the incremental hundred before that last 15.
Gets us through again up a pretty long period of time, and a pretty draconian scenario with $300 million of liquidity and I'd Revpar environment, where we're at we run even down 90%, which was kind of the worst month of the year. In April you know it gets US 27 28 months of total liquidity. So we've got a fairly long runway.
You start getting into kind of back end of the year 21, and 22 covenants at that point in time, So I think that the liquidity and even getting that last 50 million to the extent that the market dictates that we do have to get mortgages, but we've got a fair amount of runway before we get to that point.
Got it and that sorry that 27 28 thats.
With the extra hundred not the full 150 right.
That's what the full onefifty.
Okay. Thank you.
Yes.
Thank you. Our next question or comment comes from a line of Neil Malkin from capital One Securities. Your line is open.
Everyone, Dan Happy birthday.
Okay. Thanks Neil.
First question.
People have been talking about.
How does this pandemic is kind of shifted or swung the pendulum back toward owners in the brand and owner sort of dynamic.
I'm just wondering.
I'd be interested to hear how your thought in terms of.
What.
What that kind of looks like.
In terms of for how you see that playing out in terms of fees.
And standard proliferation of new brands.
And if you think that will lead.
Lead to.
Higher margins than you've seen before when everything stabilized.
Yes.
Neil Stan.
Look at I think the brands as I stated in my prepared remarks, and then a very much supportive of taking a hard look at the operating model across the board.
I think that we've made great progress and discussions on things that would help the operating model.
But that would also meet the expectations, which are as you would expect likely elevated.
For guests so.
I do think that on a broad scale that we will come out of this.
And even better operating model to the extent that we can achieve peak market margins I think a lot of that we'll have to do with the speed at which rate recovers, but I've actually been very pleased I sit on a number of advisory boards with the brands and they have been very much. So.
Port of of ways to help not just during this environment, but in evaluating a longer term solution to some of the struggles we've had from operations.
Appreciate that.
When I have is.
What I guess.
One of your portfolio is traditional extended stay.
Versus the I guess, just traditional select service.
And then.
Are there anything you know that you're seeing from co bid that would maybe make either.
And your alter in some way Youre a portfolio for capital allocation strategy.
Yes, Dan again, the the our portfolio is roughly.
Between 20, and 25% extended stay.
Yes look we love that business and should opportunities be available.
For those type of transactions and I would love to continue to grow that part of the portfolio, but we're very much very methodical on our acquisition.
The return still have to be there you know the entry point would have to be right locations. It has to be right. So that would just be one of the factors that we would look at and as we continue the evolution of our portfolio.
Okay.
Okay, I guess last one from me the med loans you have on the on the development.
What have a preliminary conversations been like with with your partners.
Based on the deterioration and.
You know any any possibility of potentially that capital stack getting pushed down and you.
You may be one to be the equity holder.
John I, probably could share that that question I'd say that they're the.
The mezz loans are with.
Very experienced developer.
I think you may have hit you.
Oh for just a second.
Oh the backup line is open just effect.
Yes.
Hello, Hi, sorry about that I think we had a little bit of a power outage.
Oh go back to the question on the Mezz loan.
This is everybody still on.
Yes, Sir.
Okay.
Look I think that as far as our.
Partners on the Mezz loans, there in a very experienced developers their properties in good markets with strong demand generators, and we do have a mechanism to push those out a year, even too so that's probably more likely.
So what direction, we'd go with those we haven't given them a forbearance for the next three months.
Which I think is appropriate given the current environment, but we still feel good about the long term prospects of these poor it's a particular properties.
Thank you.
Yes.
Thank you. Our next question or comment comes from the line of Austin Wurschmidt from Keybanc. Your line is open.
Hey, good morning, everybody.
I Hope you Havent cut the utility Bill at this point, but.
Just.
In my first question your in sort of a gradual occupancy ramped type scenario.
How should we be thinking or what range of flow through multiples should we be thinking about as you ramp costs in services overtime.
Awesome.
Can you kind of repeat that our yeah sure you're talking about occupancy for so yes, well. So I really think about you know revpar declines and how that flows through to hotel EBITDA decline sort of a multiple of of you know.
The decline to Revpar decline on you guys were 1.7 times, which stood out versus I think a lot of appears being well north of two and even three times, which may be speaks to the efficiency of the operating model you referenced earlier that 80 ours have hung in there fairly well and so as we think about a gradual occupy.
C ran in the portfolio, maybe what type of multiple or flow through should we think about on that incremental occupancy.
As you also you know re ramp costs and services.
Yeah, so well that makes that now I'll, yeah, I'll take a I'll take a first crack at this.
So I think the way that we've looked at it when we looked at retention.
And in March our March retention was somewhere between 30, and 35% and I think March is probably our our best indicator at this point, but I don't really only half the month as reflective of operating at what are kind of these very very lean staffing models I think April will be the better tell we don't have final April numbers, yet, but Mike.
Occasion is that the retention rates when as we get through April will be somewhere in kind of 35% to 40% right. So I think we'll have pretty good retention that probably implies that kind of somewhere between one of the happened two times.
EBITDA losses, a multiple of Revpar lost that that you referenced I think as we think about how revenues flow through going for a lot of its going to be as you know the mix between kind of rates in occupancy than we're in a little bit of a unique circumstance here, where this is a lot different scenario than going from.
Okay.
Normalized kind of Revpar is in growing those 235% whatever it is your at some level you have to start adding back some of that incremental labor that has been cut take manager is kind of off the front desk and get them back and bringing some of the more traditional staffing that you have so I do think we'll see good flow throughs.
I think that again, what we're seeing now in this environment is somewhere between kind of 35 in 40% type retention levels at these at these low occupancy levels that we set out today.
That's helpful. Appreciate the thoughts and then I was curious you guys have a sense of.
Within your sub markets or comp sets what percent of those hotels are closed or that have suspended operations.
Yeah, we've got some sense I would say the sense that we have is frankly, probably more anecdotal than whats getting reported by placement trial I think it's most know that travels come out and said that Intel Hotel was closed for 30 days, it's going to continue to be included as reporting in the comp set. So we're just getting now to the point where.
Some of the hotels that close later in the March month of March or into April are coming out of the OSAT I think as reported by Smith travel within kind of the high single digit percentage numbers I think realistically, it's likely higher than that you know about 8% or 9% of our total rooms are closed my sense is that the comps that sits at least that high and probably a little bit.
Higher than that we should be able to have a more concise answer to that question over the next coming weeks is as we continue to get better data from set travel on closures.
Okay. No. That's helpful. And then lastly, I think somebody earlier had kind of spoken to breakeven occupancy I'm not sure that you guys gave a figure or not I might've missed it but could you give us a sense of where you think breakeven argument is that but the GLP hotel EBITDA and then maybe on a cash flow basis for your portfolio.
Sure Austin's, Dan, but there's a lot of variables that go into that you know clearly when asked that this level, there's not as much labor and as you continue to.
Reopen in occupancy picks up there is an added labor costs. So.
And a lot of it it's a function of the rate to you. So if we we think that at a breakeven level for hotel level EBITDA somewhere between probably 40, and 45% using $100 as as a base rate.
Obviously, it depends on the market and the labor profile and the breakeven to cover costs at a corporate level. It probably 10 basis for 10 10 percentage points higher.
That does include.
Covering the preferred dividends and capex and in that as well.
Okay. That's helpful. Thanks, Dan.
Thank you. Our next question or comment comes from a line of Bill Crow from Raymond James Your line is open.
Thanks, Good morning, guys.
Just Dan or Johnson.
I think we get back to 19 levels.
Our first or margin first.
Oh, that's a great question, though I would.
At this point say Revpar is probably the easiest way back.
But it's really a function of how the operating model changes in evolving.
Combination of you know what the supply picture looks like and our ability to push rate, which.
You know both I believe will be favorable in the future, but I think my perspective would be revpar would recover first.
Alright, and then.
How much exposure or demand do you do generate from colleges and universities.
Thanks for that.
Oh, I would say, it's frankly pretty small.
We do have the.
The hotel on on Ngls campus, and we bought a hotel out in Portland that get some exposure from some of that from from the University right there.
Yeah, and with the Marriott in Boulder, but I wouldn't say, it's a particularly large demand generator across the hotel is true across the portfolio generally.
And then.
Thank you for that.
Last one for me and maybe you went through this and I missed it the house Memorial day.
Stacking up are you seeing in the.
Material increase in demand.
Uh-huh Bill, it's Dan I think 70.
Active on Memorial day is probably going to be more short term focused I think thats, where you know the pickup is likely to be.
And that's where we're seeing a lot of the successes that we're having currently across the board. So we think that will be consistent with what we've seen over the last couple of weeks.
Okay. Thank you.
Thank you. Our next question or comment comes from a line of Danny Soc from Bank of America. Your line is open.
Hey, Good morning, guys can you hear me okay.
Got you Daniel Great Great. So I'm, Dan are you hearing about any suburban property owner distress and if so like what would that mean for property values and potential M&A as things start to ramp up.
I mean, I think it's fair to say that everybody is in some level of distress right now, particularly the smaller owner operators.
I don't know that there is that an immediate opportunity.
Regardless of the level of leverage our operations I think that banks.
I have generally been supportive of smaller owner operators and giving them time to get their feedback on to them.
Yes, as far as opportunities in our priority right now is really on the portfolio and.
Based on our portfolio the location of the chain scale and the operating model, we think theres a lot of value to be created from here simply with that.
But to the extent, there's an opportunity in the future you know we do have a as good a relationship with our lenders as anybody in this space and we've got a terrific partner with GE, I see and and we could look at things.
Along those lines.
Great and and then more from the God.
Good news you strategy. So once you start ramping back up.
What is your distribution mix look like you will be an incident, maybe some channels more than typically would or do you kind of yes, that's what really decent yes, thats just going to be a mix or is going to be the same as you know when it would have been.
Three outbreak.
Well I think the one of the strengths of our ports owner operating models, who do have flexibility.
Where we were probably.
More of a balanced business versus leisure from an occupancy standpoint, I think there will be more of a bias towards leisure I think there'll be an increased focus on digital you know as we tried to be creative and proactive in driving that business. So yeah I think there.
I would definitely be a shift in tactics from our our corporate revenue management team and how we go after business and fill rooms.
That's it for me thank you.
Thanks, Dan.
Thank you I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
Well again, thank you all through your partnership and patients with the power outage, we look forward to connecting soon hopefully that will be in person.
Ill have a terrific day. Thank you.
Ladies and gentlemen, thank you for participating in todays conference. This concludes the program you may now disconnect everyone have a wonderful day.
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