Q2 2020 RLJ Lodging Trust Earnings Call

Welcome to the RLJ lodging Trust second quarter 2020 earnings Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

If anyone should require operator [laughter] during the conference. Please press star zero on your telephone keypad I would now like turn the call over to kill dollar RLJ, Vice President Treasurer of corporate strategy and Investor Relations. Please go ahead.

Thank you operator.

Good morning, and welcome to our your lot income 2022nd quarter earnings call.

Today's call loved the Hill, our President and Chief Executive Officer will discuss key highlights for the quarter.

Sean Modi, our executive Vice President and Chief Financial Officer will discuss the Companys financial results.

Tom Bardenett, our executive Vice President I, suppose Greg maybe available for acuity.

Well, we're looking statements made on this call well subject to numerous risks and opportunities that maybe the companys actual results could differ materially for what had been communicated.

Factors that may impact the results of the company can be found in the company's 10-Q <unk> other reports filed with the FCC.

The company undertakes no obligation to update forward looking statements.

Also as we discuss certain non-GAAP measure it may be helpful Group, you got reconciliations to GAAP located in our press release from last night.

I'll now turn the call them too badly.

Thanks, Nick you.

Good morning, everyone and thank you for join US we hope that you and your loved one remains healthy Wendy's and present at a time.

I'd also like to express a great deal of gratitude to our frontline associates.

Thank you to prioritize health and safety of our guest and our corporate associates, who are working tirelessly what are operators to help us navigate these uncertain time.

As we anticipated the second quarter for our industry with dramatically impacted my cobot 19.

As much of the country shut down.

The lodging industry bottom in April, but the lowest monthly demand in the history of our industry.

Demand improved in May and June, which was primarily driven by picked up leisure demand as corporate group demand was virtually nonexistent.

Although we continue to lack clarity on feature fundamentals, we believe that the second quarter will be the worst quarter of this year.

With respect to our portfolio.

Occupancy at our open hotel.

Was 24% during the second quarter.

Occupancy dropped in April 15.4 person.

Improved to 24.8% it may 31.4% in June.

Mirroring the cadence of the broader industry trends, while highlighting our ability to capture local demand.

Although a number of our hotels benefited from the lifting leisure demand in markets, such as South, Florida, Southern California in Charleston.

Many of our hotels remain suspended for significant portion of the quarter due to state mandated closures in restriction.

Urban hotels were particularly impacted by the lack of demand, which limited our second quarter total portfolio occupancy to 11.7%.

In light of this challenging background, we executed on a number of critical priorities.

First we remain focused on managing our liquidity and minimizing hotel operating shortfall to reduce our burn rate.

Second we successfully opened hotels in a socially and financially responsible manner.

Putting 21 hotels, when a second quarter and 15 hotel so far in the third quarter.

And finally, we successfully amended our unsecured debt facilities.

As we continue to navigate this crisis.

Preserving liquidity remains our number one priority.

At the outset of Cobot 19, we implemented a number of aggressive cost containment initiatives.

Including reducing staffing levels.

Closing SMB outlets, eliminating all non essential services and closing floors to reduce room inventory.

All of these cost containment efforts remain in place and have limited our burn rate.

Our second quarter cash burn was approximately $10 million lower than our expectation do a combination of higher revenues and hotels that remained open the re opening up more hotels than we initially expected and the success of our aggressive cost containment initiatives.

Our burn rate improved throughout the quarter as more hotels in our portfolio cheap profitability at the man materialize.

During June probably 70% of opened hotels achieved positive gross operating profit and over 40% ever opened hotels as he positive EBITDA.

Our success in reducing our burn rate combined with the steps. We took previously to preserve and enhance liquidity has is limiting our capital expenditures and optimizing our corporate DNA have strengthened our liquidity position with over $1 billion in cash our strong liquidity position gives us the competence.

And our ability to navigate through this period of uncertainty.

As we outlined last quarter, we developed a thoughtful framework to reopen the 57 hotels that we previously suspended in a socially and financially responsible manner.

Our approach is focused on minimizing our operating shortfalls my reopening those hotels are best positioned to control costs and capture available demand.

While maintaining guess safety and this low occupancy environment.

The hotels it must fit those criteria for select service assets, all suite hotels and hotel located in a resort or drive to markets.

As many states began lifting restrictions in May we began to execute on our plan, which led to the reopening of 36 hotels.

18 of these assets opening in June and 15 opening in July yielding positive results.

Our select service hotels, a T 35% occupancy in June and nearly 40% in July.

Our full suite hotels, including most of our embassy suites achieved 32% occupancy in June and mid 30% occupancy in July.

And our resort hotels achieved occupancy up 55% in June and approximately 45% in July.

Well hotels, and our drive to markets cheap occupancy in a low thirtys over the same two months.

We're pleased that 80% of our portfolio is now open.

The number properties and the pace at which we were able to we open and the level occupancy that we are seeing underscores the benefits of our portfolio construct.

Specifically, we were able to reopen significantly more hotels youre portfolios operating cost structure, which allows us to minimize our operating short bowls, even at low occupancy levels.

Our full suite hotels, which represent approximately 50% of our total rooms are proving to be attractive to get especially in a social distancing environment.

And our geographically diverse transit oriented portfolio is ideally positioned to benefit from the lift in early demand in all segments.

These attributes were crucial in allowing us to drive occupancy to our hotels early.

As we quickly pivoted to take advantage of all demand that was available.

This included near term leisure demand pockets of existing project base, an extended stay corporate demand from a central workers and small social groups such as youth sports teams.

Ultimately the construct of our portfolio you know geographic diversification will not only enabled us to navigate this crisis Bull also position us the benefit early wants to sustainable recovery unfolds.

Looking ahead.

Well no one knows the timing of when we will turn to pre cobot 19 lodging fundamentals.

We continue to believe that any form of recovery will likely be slow to build in order to fully recovered a pre cobot demand levels the industry needs all three segments to be healthy.

Well the remainder of the year given the current resurgence in cobot 19 cases across a number of states, including Florida, Texas and California.

We remain sober as it relates to the sustainability of leisure demand, particularly after labor day, and any recovery corporate or group demand, which we expect to remain anemic.

Well, we along with the rest of the industry are facing extreme challenges. We continue to believe a relative positioning will allow us to rebound sooner and take advantage of opportunities at the appropriate time.

Our confidence continues to draw for our lean operating model, the construct and geographic diversification of our portfolio, our strong liquidity position any embedded value creation opportunities in our portfolio.

In particular, our portfolio of Flex service and compact full service hotels, which have a smaller footprint and lower operational complexity allows our hotels to break even at low occupancy level.

Our lean operating model allows our hotels achieved profitability earlier.

Our transit concentration and the nature of our hotels positions us to ramp up early during the recovery in our all suite products will further bolster this ramp as a new normal unfold.

And finally, we continue to believe any better opportunities within our portfolio, which have the potential to unlock significant shareholder value long term.

We are already seen the benefits of the relative advantage that our portfolio offers.

As evident in our second quarter performance.

Given the number of open hotel the pace of I can see ramp up and the number of assets that a t. positive EBITDA.

All of which continued into July.

Whether or not current demand levels are sustainable in the near term is unknown.

Nevertheless, our recent performance illustrate that when if sustained recovery does unfold our portfolio should benefit early.

Overall, we believe that these differentiating attributes.

Combined with our sizable liquidity over a billion dollars and flexible balance sheet continues to position us exceptionally well not only to navigate an extended period of uncertainty but to emerge in a relative position of strength early in a recovery.

I'll now turn the call over to shot for more detailed review financial results and liquidity Sean.

Thanks, largely as expected April Mark the low watermark for lodging demand, which was significantly impacted by cobot 19.

I'll still what did you make levels weekly occupancy is gradually improve from equal April lows during may and June.

Turning to the numbers, despite still having 36 suspended hotels throughout the second quarter. We will continue to include all hundred three hotels within our reported results.

Our second quarter Revpar contraction of 91.4% was primarily driven by a 71.5 percentage point decrease in occupancy.

At a 38.5% decrease in average daily rate.

During the quarter, our portfolio actualize, the absolute occupancy of 11.7%.

I have average daily rate of $115, a 94 cents.

Hi, poor contracted substantially throughout the quarter declining by 95.1% 92.3%.

And 86.6% in April May and June respectively.

The second quarter results for our opened hotels were meaningfully better with occupancy up 24%.

An average daily rate of $117, resulting in revpar of $28.

[noise] open hotel occupancy bottomed out in April at approximately 15%.

Sequentially improved each month at approximately 25% and 31% in May and June respectively.

As long as we mentioned performance at our opened hotels improved throughout the second quarter as our mix of resort properties.

Hotels and drive to leisure markets and all suite hotels benefited early from the left and leisure demand.

We are pleased that our Koubei all suite hotels gained 2000 bases points of market share during the second quarter.

And being the quarter with an index of approximately 135%.

Which underscores the relative attractiveness of this product type.

Third quarter Revpar is expected to improve from the lows of the second quarter as 82 of our 103 hotels are open.

And we expect leisure demand to remain healthy through at least labor day.

As an example of current operating trends, we expect July revpar to contract by approximately 80% for the entire portfolio.

For our opened hotels in July we estimate occupancy of approximately 32%.

And HDR of approximately $122, which was inline with our opened hotels HDR in June.

We are encouraged by the fact that we expect our 103 hotel portfolio to generate positive gross operating profit during July which is the first month a positive GLP since the start of the pandemic.

Our ability to quickly returned to positive GDP is a good representation of how our portfolio can perform during its sustainable recovery.

Turning to the bottom line, our second quarter pro forma hotel EBITDA, and adjusted EBITDA were negative $42.7 million and negative $50.5 million.

Respectively, and adjusted FFO per share was negative 49 cents.

As long as we mentioned we continue to remain remain committed to monitoring operator compliance with the aggressive cost containment initiatives that we instituted last quarter.

Underscoring, our lean and flexible operating cost structure, our second quarter operating costs declined approximately 70%.

Our team was vigilant on controlling variable cost during the quarter.

Achieving a 73% reduction in wages and benefits.

As you would expect our team remains focused on cost containment initiatives to minimize operating shortfalls in the current environment.

Turning to liquidity.

I would like to reemphasize that we entered the year in a strong position with approximately $900 million of cash and an undrawn line of credit.

Even with a strong liquidity our efforts continue to be laser focused on ensuring that RLJ has adequate liquidity to withstand a protracted period of disruption.

To that end, we've continued to suspend our capital allocation initiatives, including ROI projects and the Wyndham conversions until we have more clarity on the outlook.

Additionally, we continue to closely monitor our monthly cash burn.

We were pleased that our second quarter operating shortfalls were lower than prior expectations.

Which assume the continuation of April demand trends for all of 2020.

Our second quarter average monthly operating shortfalls were approximately 40% better than our expectations.

Which was primarily driven by three factors.

First revenue at our open hotels was stronger than expected as leisure demand rebounded sooner and stronger than expected.

Second we reopened 21 hotels during the quarter, which was more than expected and led to revenue that reopened hotels exceeding expectations.

And third our cost containment initiatives were more effective than assumed with particular success and managing wages and benefits.

The operating shortfalls that individual hotels will differ by hotel type location and other factors.

The average monthly operating shortfalls at our focus service hotels has meaningfully better than operating shortfall that our full service hotels.

Overall based on our portfolios lean operating model our hotels, the operating shortfalls will continue to be substantially better than portfolios comprised of traditional full service hotels.

For the other costs.

Our assumptions have not changed for hotel fixed costs, primarily property taxes and insurance.

And corporate level outflows, including dividends that serve SNG anyway.

Inclusive of the second quarter.

Monthly cash burn is now expected to range between $25 million and $30 million, reflecting a 5 billion dollar reduction to the top end of the range and a 2.5 million dollar reduction at midpoint.

The improvement in the range is primarily attributable to the better than expected hotel operating shortfalls, which represent 25% to 30% of our total cash burn.

Our monthly cash burn is expected to be towards the low end of the range of lodging demand remains at current levels and the high end of the range if lodging demand contracts from current levels.

The timing of actual cash outflows will be lumpy as our fourth quarter fixed costs and corporate outflows are expected to be higher than the third quarter due to the timing of payments of senior notes interest insurance premiums and property taxes.

And the operating shortfalls could be impacted if there was a post labor day decline in lodging demand.

These estimates exclude RLJ funded capital expenditures.

Regardless, we expect the end of year with significant liquidity and remain well positioned to withstand a protracted period of limited hotel demand.

Turning to our fortress balance sheet, we ended the quarter with approximately $1 billion of unrestricted cash.

$2.6 billion up that.

And no debt maturities until 2022.

We continue to maintain significant flexibility on our balance sheet.

As of the ended the quarter approximately 88% of our debt is fixed or hedged and 84 of our 103 hotels are unencumbered.

During the second quarter, we further enhanced our financial flexibility and amended our corporate line of credit and term loans to waive quarterly financial covenants through the end of the first quarter of 2021.

And also reduce certain financial covenant threshold through mid 2022.

We continue to place great value on our lending relationships and have remained aligned with our lenders during the entire process.

As we look ahead given the high degree of uncertainty we continue to lack visibility on the timing and cadence of returning to pre cobot 19 levels of demand.

That said, we're confident that lodging demand will ultimately returned to pre crisis levels.

In the meantime, workload continue to closely monitor industry trends and stay nimble as we react to the changing environment.

Despite all of the uncertainty facing our industry RLJ remains well positioned with a flexible balance sheet ample liquidity lean operating model and a transit oriented portfolio with embedded catalyst.

Thank you and this concludes our prepared remarks.

We will now open the lines for Q1 day.

Operator.

Thank you if he would like to ask a question. Please press star one and your telephone keypad exacerbation till indicate your line is in the question Q.

Hey Press Star Chill, if you would like to remove your question from the Q.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star as he is our first question is from Wes Golladay with RBC capital markets. Please proceed.

Hey, good morning, everyone. It's one of picking a frame up how close is it to make financial sense for some of the conversions up more leisure oriented hotels now looking at Charleston in Santa Monica and are you just maybe holding back on these problems just wanted to preserve capital for yourself or it may be the brands have key money on both the trying to get a sense we're out there.

Hey, good morning, with look I think that as we've talked about before that you know preserving capital there number one priority right now we're in a very unique situation and not really understanding how long so dislocation will last.

And when the new normal and how the normal unfold you know that said, we're working hard to continue to design work on the Wyndhams as well as finalize our negotiations with the brands inflect. The manager so that we can hit the ground running and move forward with those with those renovations as we said at the beginning of this year, we expected to start.

Two renovations this year into next year.

And we continue to believe that's the right sequencing.

But that's going to shift by about a year is what our current thinking is.

Okay, and then maybe you can the with occupancy being a little bit higher than you thought how closely to open up some of the SMB outlets.

Okay.

Hey, West this is Tom.

Right now we're still very careful in regards to the SMB.

Deliverable and the reason for that is predominantly when we look at our select service assets. You know, we're doing a bag breakfast in the morning and at the lower occupancy levels that seems to be acceptable based on the consumer behavior and what they're looking for in our resort properties. We do have you know to go menus. We're also.

Oh, providing beverage opportunities around the pool, where there's opportunity to be profitable, but overall food and beverage in regard as the catering and the meeting space and what's going on based on the demand. That's in the hotels I would say, we're a little ways off in regards to going back to normal FNB levels in regards to what we're going to be we're providing to our gas.

At our hotels and what's the add on to Tom's comments, one we do believe that there's some risk in the fourth quarter pull back that we mentioned in our prepared remarks, but the other thing that I would point out to you as we sort of think about the new normal.

And how to sort of think about the new operating model. The SMB is where there's a greatest opportunity for improvement whether it's the approach to the service buffet versus room service offerings on the level of offering the staffing hours of operations. So we're not going to be in a hurry to reopen that until we really understood.

Dan how we can re imagine an SMB, we're working really hard with the brands to be able to sort of do that.

Okay. Thanks, taking my questions.

Our next question instrument Anthony parallel with Barclays. Please proceed.

Hi, good morning, So Oh.

Opened yesterday seen committee gauge the optimistic but.

They thought that kind of current trends candidates persist through the rest of the year end some of your other peer seem good believed that.

There may not be a sharp drop off in the fall you seem to be more cautious maybe if he's going to maybe why.

Yes, you are a bit more costly than some of these other market participants will be great.

Yeah.

I would say look our general House view is that August will look much like July.

But that leisure will taper off after labor day as kids go back to school now we recognize that weekends main performed better in the back half of the year than in a normal demand pattern because people will still have and desire to get out of their homes.

So we think that there's some opportunity there, but by and large it's not going to be able to supplement what we're seeing over the summer.

And then as it relates to be team. We think its can be very limited mimic corporations have push the reopening of their office is off to next year. Many of them have we think that business travel will correlate with that and so we don't see that materializing after September to replace the leisure demand, we see right now.

And then right now there's very limited to know group.

That exist in cancellations are continuing on the same path whatever is on the books now which is very limited we expect that they continue to cancel and there's no catalyst for the change as it relates to the group environment. So from our perspective, you know the booking windows right now are extremely short zeroed.

Three days, if you look at what we've experienced so far 50% of our contribution has come from that viewed a three day window. So we don't have the ability look forward.

But you know we just don't see.

The demand is going to replace the level of leisure that we have to today.

And then if any to bolt on to several as we've commented stood thing that I think is worth noting is that.

Notwithstanding of what arc sort of house view of caution is for cautiousness for the fourth quarter, we still have 80% of our portfolio opened in position that if the fourth quarter is better than we expect we're well positioned to.

To capture that that demand the hotels that remain.

Suspended still are generally roughly half our clustered hotels that war veteran clusters that have opened hotels as well with the balance in sort of some of those core urban areas.

That I think our view around the demand around some of the core urban areas San Francisco, New York, specifically, our we're certainly more cautious and I'll take any different from from our peers on those markets and so I think our portfolio.

Set up to benefit from that.

But also when we think about how we manage costs.

And are able to flow in that environment.

Having that cautious tone is enabling us to continue to be vigilant around our cost containment initiatives.

Yes, understood and then there's lot of talk about it gets smaller regional business travel, maybe being a bit better than national corporate travel. This fall odd to be sure that view or are you still cautious on that what kind of local business travel as well.

So what I would say is that that local business travel in the small group is right in our sweet spot and our product and portfolio makeup is designed to capture that right. So.

If you look at our contribution this quarter of we got about 10% from now from small groups and we had about 20% from whatever little BT. There was out there what I would say as it those are numbers are relatively anemic, but they represent how our portfolio reform when that type of demand comes back, which we expected to be the earlier.

Or demand, which is what you're alluding to.

The fact of the matter is it's just not enough Anthony to replace what we're seeing on the on the leisure site today is what our general current house view it.

Got understood and just maybe one more on the one them one burger conversions.

Are you seeing the brands come up with easier terms like.

Ah favorable you ramp ups are more key money I had the brands all try to kind of <unk> burden.

And the current Barb.

Anthony what I would say that we're in active negotiations and that these are high high quality highly sought after assets and so it's very competitive and we feel good about what we're going to be able to get from the contribution of the brands.

Yes.

Thank you.

Our next question is from Austin Wurschmidt with Keybanc. Please proceed.

Hi, good morning, Thanks, one more maybe on Wyndham I guess with with kind of still moving forward with the planning there and having your ducks in a row.

It's both capital Justin.

Once you feel comfortable.

Your line of sight on normalizing conditions whats the timeline for turnaround on on those conversions.

Yes.

What are you broke up a little bit, but you know I would say that again, we had anticipated starting to projects this year and starting to the following year and that's still the sequencing, but it's pushed off by a year.

And so I would expect a you know a year to 18 months lag on from start to finish on the on the fully completion of of those renovations early we would expect Charleston in Santa Monica to be the earlier, you know assets and we think that those assets will ramp up nicely, assuming you know a normalized.

Demand levels.

Understood and then just curious about your thoughts on what you're seeing with then from a shadow supply perspective, putting your competitive sets and sub markets make you feel like a lot.

Feeding hotels are open along with you know in markets, where you have opened hotels are still a lot more you know.

Suspended hotel that that are likely to reopen.

Well if you follow the pattern of whats opening in what's still suspended what we're finding in our markets.

Is it is predominately all select service seems to be open except for consolidated in hotels are in the same proximity similar to our portfolio and then full service hotels started to open in June and July that are smaller in nature more compact full service and then the largest full service hotels that have those significant amount of group exposure as well.

As meeting space or the last opened outside of the urban environments that Sean Turk talked about earlier and San Francisco in New York, and then obviously and Hawaii based on what's going on with the ordinance in regards to what's happening out in Hawaii until that opens backup, but what I would say is in regards to shadow supply air being based certainly.

Is continuing to.

Do well, but we're also finding that in our world. The the ability to have flexibility for the consumer and allow them to cancel and have that ability to come and go as they please over the last two three months has actually spurred demand for our brands as well as our premium brands that we operate whereas a host and they are being.

He is responsible for the cancellation. So we think thats an advantage for our space in regards to the hotels versus their bnb for the next two or three months as well I think the other element just to add on to Tom's comment about the shadow supply, while we do think that air being bees of the world will do fine on the leisure side, we think that the other business segment.

Is that they were trying to get into pre covert like on the business traveler. We think that that is going to be stunted. We didn't that corporations are going to be very focused on safety and liability and they're going to want a the there their employees to know that they're safe and at the brands represent that so we see that those segments being stunted Austin.

I appreciate that and then just last one from me sorry, if I missed this I know you touched a little bit on how 80 ours have trended, but have you seen kind of 80, our growth track month month and specifically into July.

Sure Austin, we've seen 80 are pretty much stable really from a from late may through through today. Our July 80 ours, we're right in line with our with our June 80, ours, which we which we included in the in the prepared remarks, and so what we're seeing across the country is.

That theres a consistency.

In 80 ours and in most markets, which leads us to believe that that that you know the ability in this environment to really aggressively yield manage.

Just is not really be there the reality in today's environment and so we are.

Picking up business.

Picking up occupancy at market prevailing rates that theres, just not a lot of variability within those within the within the market rates out there.

And so when you look across our portfolio, it's been pretty consistent.

And so just add one other thing I would say than when you look at channel contribution and you think about what's happening out there with the mix that's going on today typically what we talked about earlier was GDS is down which is where corporations book Otay percentages is it a little bit up. So therefore thats use the that you know at bar rates.

Based on parity and then group is down which is you are too high a segments in regards to average rate or the ones that are down. So it's really more of the dynamics of what availability is out there who your pricing to be able to get that discretionary traveler and leisure travel, which is typically looking for a discount as well as the brands offering those discounts to try to increase demand.

Yeah, I would sort of summarize our revenue management strategy as a heads in beds in a race to breakeven.

The simplify it opening all channels, taking advantage of whatever demand is out there as long as its helping our burn rate and to Tom's point, what's out there as the lower rate of business today, the leisure medical and now we're seeing education.

Obviously with schools looking for alternative housing.

And even the BT that we're seeing is largely related to two medical all of that is on the lower end a rate Austin.

Yes, that's certainly that's great. Thanks, everyone.

Our next question is from Chris Wonder Onco with shipping. Please proceed.

Hey, good morning, everyone.

Some of these operational changes that you've made to keep the cash burn levels low and.

Actually improve margins if you will.

Hi.

How many of those can stick around kind of longer term and at what point do you think you you have these conversations with your with your brand operators and now how do you how much luck do you expect to have convincing them to make some of these changes permanent.

Oh look first of all all parties are working collaboratively to control costs and reduce.

Burn rate and also to Reimagine the model, but it's really too early to say, how these things will actually unfold, what's going to be permanent what's going to be temporary.

Our overall house view is that the puts and takes are going to generally be neutral, but and it sort of thinking about it in a couple of buckets as.

As I mentioned earlier on I think FNB has the greatest opportunity for a long term change around the approach the offerings staffing in the hours I.

I think about housekeeping, we already know the frequency housekeeping is down within the rooms, but increased in the public spaced unknown, how that's ultimately going to unfold based on consumer preferences.

Yeah, so to think about the impact of technology, that's had been implemented like mobile even allowing for a contact list check in I think it's here to stay because people have made those investments.

Some things that are on the temporary bases were seeing amenities being cut down whether it's no ballet no valet or no coffee in your room some of that stuff will come back, but I think it's too early to say exactly how that will unfold, but what I would also point out to you that our you know better performance on a burn rate while.

We had aggressive cost containment and that paid a roll it was largely focused on the fact that we had greater revenues.

This quarter.

Okay Fair.

Fair enough and then.

On on the Knickerbocker. The fact that we expect a lot of inventory come out of the New York market does that change the calculus at all in terms of your your longer term kind of.

Holder sell decision on that on that asset.

Okay.

No I mean, I think at the end. The day you know we made the decision on that asset with information that we had at that time, we continue to believe.

That.

In New York long term, we recognize that near cash challenges and it's going to have to overcome the stigma of being hotspot early and that international is going to lag.

But you know there some green shoots in New York related to some hotels, not reopening and want to see all that will unfold assist too early but we recognize that on a relative to other markets New York is going to lag.

Okay.

Okay very good thanks.

Our next question is from Tyler.

With Janney capital markets. Please proceed.

Hi, Good morning. This is Jonathan on for Tyler. Thanks for taking my question first thing for me wondering if you could provide some additional color on the recent trends, but in seen in the portfolio, particularly in July and 60 degree stays for co located in rising.

Okay.

Sure what we've seen.

And within the portfolio is.

We're generally stable in both June and July with occupancy rate will ask him as I mentioned in prepared remarks, we'll stable and so the only market across our portfolio that we saw a little bit of a pullback in demand was key west where we where we have to two hotels.

Down there in key west where we were running.

The seventies of occupancy and we've we've what we that's now down to.

Hi, 50% to 60% over.

Over the last few weeks still healthy instill among.

On the top in our portfolio, but we just didnt see the upside.

But I would characterize our portfolio today, even with the increased.

Covert cases as.

Stable the other hot markets.

And then lastly in California, our hotels are actually performing steadying really didn't see a fall off there.

Okay, Great. That's very helpful. I appreciate all the color there and then second question as it relates to reopening the hotel.

Has it been any surprises of changes, but the branch there and the way they're thinking about <unk> are you guys are thinking about ramping up the remaining close to a toast.

I think the biggest surprise was how short to booking window.

You know, we thought that when we open hotels that we would be able to sort of look out and the reality of it is is that we can't.

Bookie window was zero to three days and as I mentioned earlier, and we're getting 50% of our occupancy contribution in that zero three a window.

And so what the lesson that we learned.

To paraphrase one of my team members is the open hotels of booking hotel.

And so the lesson learned here for us is really to open the hotels.

And so we even if we see a pull back in the fourth quarter, we do not anticipate recent spending our hotels.

And so when I look at the balance of our hotels. We of 21 that are not open we expect to opened three to five in the month of August which would leave about 18 16 hotels rather.

Waikiki as in there clearly that's going to be tied to the ordinance that's in place Louisville, our largest one of our largest assets.

We expect to open in the near term and then that leaves San Francisco in New York, where you have larger boxes higher cost structure and so while we expect to open those before the end of the year of the reality of it as they are going to lag.

Based upon what we're seeing right now.

And then one more or less than I think which is important for us, which sort parmesan. It lessens comments and is that.

We were able to decrease operating shortfall that much lower levels of occupancy then we would've thought going in into the pandemic when you look at.

However, hotels are performed even with relatively limited demand.

We were able to cut in our operating shortfalls and that's a function that we're running these hotels with minimum staffing incremental staffing required for for those levels of demand is very low which allows us to reduce operating shortfalls and so.

That works with leather these comments about.

Being hesitant to close hotels, again or suspend hotels again because.

R. R break even if you will to make that decision you got a much lower level of occupancy then we would've thought three or four months ago.

Okay, Great I appreciate all the diesel that's all for me. Thank you.

Our next question is from Gregory Miller with Trust Securities.

I'm sorry truth Securities. Please proceed.

Thank you very much good morning.

There has been a lot of discussion in the hotel industry today on music outsource staffing I'm curious what your physician is on this matter and what cost implications may result.

So.

Look on the on the labor front.

Greg.

Are seeing.

The need for some contract labor and some of our markets, particularly Boston Atlanta Orlando.

And we've seen cases were bringing back staff has been a little bit talents, whether it's the unemployment benefits or childcare or concerned about risk for their family. So we say obscene an uptick in contract labor currently we're running at about 20% to 25% of our normal labor levels at hotels, whether it's full service or <unk>.

Service.

But we are seeing pockets were we do have to to use contract labor.

Thanks.

And.

Just one more question of from from US on the William side.

Yeah, I concur with a great real estate and the long term growth catalysts.

Which conversion opportunities.

But one could also make a case that some of the hotels could also be theoretical disposition candidates.

Especially if material incremental EBITDA post conversions could be at least a few years away.

Would you entertain disposing some of these hotels.

Given today's macro environment.

Look I think that.

We did the heavy lifting on dispositions last year, which is what put it in a great position this year coming in with liquidity. It we have today.

Based on our current burn rate assumptions, we don't have a neat to sell an asset today, having said that.

All assets at any point in time are for sale at the right price what I would say to you, though based on the backdrop that you describe the window methods are actually performing relatively well and we would see those as beneficial to maintain and our portfolio in the climate that you described.

Alright, Thank you very much.

Our next question is from Neil Makin with capital N. Please proceed.

Hi, guys. Thank you.

First question.

People talk to you on the call about.

Central slow down in the fourth quarter.

I'm just wondering in terms of that what are you guys doing to prepare yourself or to be more defensive in terms of.

Limiting the downside or the deceleration.

That you are likely to see on the leisure side.

Going after.

Opportunistic contractor first line people or universities kind of like you alluded to you and anything that you could talk about that would help.

Defend against that.

Yeah. So.

This is Tom a couple of things from a strategic standard points.

What we find is the small group business is still starting to book and we're focusing on making sure. We're we're trying to replace some of that leisure and that is actually coming on weekends, because it's social weddings sports groups youth teams, we are finding and an increase in the amount of leads that are happening from people from 10 to two.

Five in regards to that area. That's one thing that we're looking at.

Did mentioned that we're lacking in a couple contracts with the dorm business, where we have a buyout in one location and then probably 50% of the hotel and another which will be coming in and this fall and so we're encouraged there based on the current level of demand and those markets that that was a really smart profitable decision.

On the top line and then lastly, I would say above and beyond the top line in the focus on strategic sales. We will tend to continue to maintain the cost levels with the slower amount of fte's all approvals have to come through us with our management companies in regards to what they're going to add and being very thoughtful in regards to being prepared.

In case occupancy in revenue levels aren't at the levels that we're enjoying right now in July and August because of that leisure demand that you mentioned that gives you a little bit of.

Specifics in regards to our strategy around that.

Anything that I would add onto that.

As we mentioned earlier and prior question was that we are smarter now on how to toggle between the level of occupancy we see now and the level occupancy that we think there will be at possibly be at in the fourth quarter and so our ability to run at a suspended model labor.

Pool versus where we're at now we know how to toggle between that despite having the hotel open <unk> also come to understand how.

Some of the cost like for example, utilities and cable and other other things that are sort of normal that you have we are open.

We've been able to figure out how to even get incremental savings off of that so we are preparing.

Mentally and through a dialogue with our operators that things are going to get software not waiting till they get software assuming that they're going to get sauce, and we're managing a tight control around.

That are being made in in preparation for that.

Okay, great. Thank you.

Other question for me is.

Do you guys have a fair amount of exposure two cities on the coast that have been.

That I've seen upticks in.

Radical legislation social political unrest.

Violence, increasing on affordability, how do you know I understand these things are.

Relatively recent but I feel like building over a couple of years How'd you navigate that.

In terms of the next cycle in terms of demand shifts are capital flows.

I also know people always say well, it's hard to build in San Francisco and I agree, but I would argue that the restrictions in that.

The very onerous union requirements are basically synthetic supply anyway. So just to get your comments would be very helpful.

Okay.

I think first and foremost is that you have to have a long term view you can't make decisions based on what is going on right now and this moment again as I mentioned before this is the complex environment complex environment, we and we don't know how long dislocations going to last and we don't know what the new normal is going to be some of these things are a result of what's happening, which we ultimately hope will be.

As a medical solution is is is evolve, but we also have to look at the overall diversification of our portfolio and our footprint.

To make sure that we're sort of minimizing our exposure then Martin said, we think have outsize risk.

Factors that you described.

Okay, Great and then I can get one more time for you.

Your biggest brands emcee suites talk about that a lot.

Many factors sources of demanded that generates how is that brand performed over the last couple of months I'm into July and then can you are there any discernible trends and how different brands are performing within your portfolio.

Yes happy to answer that.

Performance of embassy suites for the quarter.

Right up was about 15% occupancy roughly when we look at the brand performance and remind you that quite a few we're closed during some of that month. So.

All in number for instance.

And out of the 21 assets 12 were in that number that we're actually open in the month of June it's improve where it ran 22% and then we started to open up some of those assets because of the opportunity that we learn where the demand was available in the market again in July we feel good about how that's performing in fact I was on the.

Call with Hilton yesterday about how that brand is performing and it's all suites brand portfolio, obviously home sweet home to an embassy suites and I think one of the key drivers for embassy suites is what we talked about earlier, it's the to base sweet.

It's the opportunity that's of value proposition and as <unk> always seen with an embassy suites over the last 20 years that brand hours indexes other brands because of that value proposition during the downcycle and certainly were in one right now we think when we look at small groups and what's been attractive for the embassy.

<unk> brand that fits exactly in that area, where people want that to base. So they can have kids and one room, while the parents are watching T V and the other room as an example of that so we feel good about.

What's happening even though we're in a unique environment we're tackling.

Opportunity with going after business at the embassy suites brand attracts yeah, and noticed sort of taco onto it.

Comments.

During the second quarter are all sweet product game as I mentioned that prepared remarks, 2000 basis points on market share in our sitting at 135% sure with a narrow sets. The majority of those are embassy suites. Some of the stats are on the second quarter of a ton mentioned are influenced by the cadence with which we.

Which we open the hotels, but we remain confident that embassy switch is well positioned to outperform they had a strong July.

So we think that'd be seen with as well as are all suites hotels are going to be a difference maker for our portfolio.

In this environment and as we come out of it and the last point that I would add to that is is that as we mentioned before 40% of are open hotels or break even after EBITDA level and 68% of those were sweet products.

Okay. Thank you guys very much.

Yeah reached the end of our question and answer session I would like to turn the conference back over the Leslie how for closing remarks.

Thank you guys for joining us today as we discussed on a call. There's no denying that the entire lodging industry is continuing to face extreme challenges.

However, <unk> situated well with a strong liquidity or lean operating model and a favorable position with the asset typed in our geographic footprint I hope that you and your family say safe and then you guys find a way to enjoy this unusual summer b well everyone.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful weekend.

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