Q2 2020 Hersha Hospitality Trust Earnings Call
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Good morning, and welcome to the harsh Hersha Hospitality Trust.
Second quarter 2014 conference call and webcast.
All participants will be in listen only mode.
This is Dan please call the specialist.
Sarkouhi followed by zero.
After today's presentation, there will be an opportunity to ask questions.
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Please note this is that being recorded.
I'd now like to turn the conference over to Greg cost That's Investor Relations. Please go ahead.
Thank you Danielle and good morning, everyone joining us today.
On to the Hersha hospitality Trust's second quarter 2020 conference call today's call will be based on the second quarter 2020 earnings release, which was distributed yesterday afternoon.
Prior to proceeding I like to remind everyone that today's conference call may contain forward looking statements.
These forward looking statements involve known and unknown risks and uncertainties and other factors that may cause a complete actual results.
Our financial position to be considerably different from any future results performance or financial position.
These factors are detailed within the company's press release as was within the company's filings with the FCC.
With that it now my pleasure to turn the call over to Mr., Neil Shah Hersha Hospitality Trust's, President and Chief operating Officer, Neil you may begin.
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Good morning.
Good morning, everyone and thank you for joining us on today's call. Joining me. This morning, our Jay Shah, Our Chief Executive Officer, and Ashish Creek, our Chief Financial Officer.
We understand it's a busy last few days of the earnings season, and everyone is quite familiar with the environment. So we will jump right in.
During the first week of this a pandemic, we took decisive action and focused on capital preservation through several critical steps.
We suspended dividend distributions on both our common and preferred securities preserving approximately $72.5 million and we deferred all planned capital expenditures for the balance of the year saving approximately $20 million.
Additionally, at the corporate level, we reduced our SGN a run rate by 25% for 2020, well at our properties. We suspended operations at 21 of our 48 hotels, which led to a reduction in operating expenses approximating 80% on a go forward basis.
These were difficult, but necessary moves and we undertook these actions to ensure we had sufficient flexibility through this pandemic.
Early in the quarter, we amended our credit facility to access our senior revolving credit facility and received a full financial covenant holiday for five quarters with the next Covenant test on June Thirtyth 2021.
We've had a decade long relationship with the lead banks in our Bank group and we appreciate their partnership during this unique time.
We spent most of the two most of the second quarter reopening hotels, a word of thanks before I go any further for the courage and commitment of our for frontline team members at each of our hotels each of them adapted to a highly efficient operating model provided anticipatory service from behind Plexiglas.
Yes, and engaged a completely new guest profile and they did so safely graciously and effectively.
The Lions share of the 27 hotels that were opened in April and May consisted of our limited service drive to resort offerings that we're able to drive rate and occupancy exceeding our internal forecast.
Early April is when we saw the trough for our open portfolio boarding a bottoming out around 19% occupancy, but incrementally growing through the balance of the quarter ending June at 39% occupancy.
Most of the 27 hotels that have remained open throughout the pandemic and the seven hotels that have opened since June 1st or able to run with a marginally size style, allowing for lower breakeven levels and the ability to generate gross operating profit with occupancy is around 25% to 30% or a 60% to 70% Revpar decline.
Line for EBITDA level breakeven at properties.
Our focus service portfolio, whether branded or independent offer significantly more flexibility as it relates to staffing levels and job sharing opportunities minimizing costs, and ultimately, allowing us to either profitably maintain operations or reopen assets more expeditiously.
As we've discussed on past calls our franchise model and close alignment with H M and our operating teams also allows us to adapt our staffing and operating models in real time.
This close relationship coupled with our cluster strategy to maximize revenues and generate marketing evident advantage and economies of scale for cost efficiencies and sales has yielded consistent market share outperformance versus our comps that article independently.
This relationship is proven to be critically beneficial over the past five month in determining which hotels to open consolidating demand to optimize breakeven and driving local decisions. This will continue to drive outperformance throughout the recovery phase.
We expect to have this substantially all of our hotels operating by the end of September and now more than ever our ability to stay nimble and leverage our flexible operating model and close connection with our independent franchise, operator allows us to reopen and operate our hotels in a cost efficient manner gives us the opportunity to reduce our.
Cash burn rates and breakeven levels meaningfully and sets up our portfolio to generate cash flow as we navigate this recovery.
Drive to resorts have been our strongest performers local regulations and travel bans dictated are opening of these hotels, but with each month of performance, we are seeing meaningful growth in occupancy and strong rate integrity.
We expect a longer leisure season, this year with disrupted schools work from home employees.
Low gas prices and continued stimulus.
Our sanctuary Beach resort was the best performing asset during the second quarter ending the period at 71% occupancy with a 340 dollar HDR and success continued in July with Revpar growth of 12.4% for the month.
The ramp began in mid April and extended throughout the quarter as travelers became more comfortable leaving their homes and socially distancing on the California coast.
We opened hotel Milo in Santa Barbara more recently.
But it is ramping up quickly, particularly around the weekends, where 80 ours close to prior years.
On the East coast, the Annapolis waterfront hotel on the Chesapeake and the Mystic Marriott, which opened in mid June are delivering operating profits. This summer.
South Florida has been more choppy government mandated closures impacted our portfolio as key west was close to visitors and nonessential per personnel and Miami Beach hotels were mandated to close to prohibit the spread of the virus.
Restrictions at both municipalities were lifted on June 1st and this led us to reopening our parrot key hotel in key west and two of our Miami Beach hotels, the winter Haven and the Cadillac.
Early results in both locations were promising, but notably at the parakeet, which saw travelers arrive from the southeast and even from the north Eastern Midwest.
But the recent rise in case counts across the Sunbelt led to the closure of Miami Beach and restrictions at bars and restaurants in key west over the July 4th weekend, which hampered the rapid ramp up we were seeing in these markets.
We believe occupancy is that these hotels will really reaccelerate in conjunction with decreasing case counts and easing restrictions across the southern states.
But the third quarter may still be challenge with weather or headlines in Miami Beach.
But judging from the number of new Yorkers still coming to Miami and even these conditions, we expect the seasonally high fourth and first quarters to be robust once again in Miami Beach.
Our urban gateway markets have been harder work the headlines surrounding corporate travel international travel and events remain bleak.
But fortunately the domestic travel restrictions and quarantines instituted by major coastal cities should ease in the coming weeks and months on a city by city basis, and should open us up for more leisure travel.
Our operating model and alignment with the teams that each of our hotels provides the speed of decision, making on innovative ways to drive operating profits from each of our locations.
We've been able to open hotels as we source new business in each of our clusters and our limited service business model allows a staff very efficiently during this low demand period.
Our sales and marketing teams have stayed nimble throughout the pandemic remaining cognizant of travelers increase collectivity as it pertains to authentic and relevant experiences, but also proactively staying connected with local demand generators.
This approach was very productive during the second quarter as our team secured contracts with local hospitals and frontline personnel across our portfolio with perhaps the biggest success in New York City, we have government groups and medical staff that are JFK assets police and fire Department crews in Brooklyn, and at our Hilton Garden Inn Tribeca in Midtown East.
And lastly contracted with a leading medical institution lower Manhattan at our Hampton Inn in the Seaport. All of this led to 61 okcupid, 61% occupancy for our seven open New York City hotels during the second quarter.
[noise] our sales team has since pivoted from first responder business to more normal business.
Despite the bleak headlines on corporate travel among the largest companies some parts of the economy are beginning to travel our sales in our local property team is directly have had success sourcing new business to our hotels in Philadelphia the team secured.
Major League baseball and the NFL to build a base for transient compression in New York Baseball in hockey teams for shorter stays in each of our markets. We've sourced significant design and construction business. There are a lot of buildings to prepare for a post kogan build out or projects under development.
In Boston, we contracted a buyout for the box or to a local university to houses their students from September through May.
For universities, and even a hybrid model travel demand will increase relative to the spring or summer.
We have secured business with TV broadcasters and news organizations in Washington DC.
Content production and studios are beginning to mobilize in Southern California, New York courtyard West side.
And Netflix and other producers are producing on the east coast cities as well.
All of our Submarkets are seeing a more general purpose health care business patience and family for elective surgeries, but also medical equipment another technology vendors.
Consulting and financial services has been slower to get on the road, but we hear of the first banks beginning to travel or consider buyouts for meetings, we're allocating inventory hotel inventory for employees to avoid commutes or simply arranging day work rooms.
Early results from July are promising with 80 are only down 25% across the portfolio year over year as occupancy showed some signs of growth, especially in our urban markets outside of New York.
A few more thoughts on New York.
Prior to covert 19, new Yorkers, one of the toughest markets in the U.S. to achieve rate growth despite record visitation year over year as the city, we're seeing new supply increasing approximately 4% each year over the last several years.
We've already seen the headlines of big Bucks hotels in New York closing their doors forever as many as 5000 rooms among them. So far and we think of this is the tip of the iceberg in terms of hotel closures industry researchers have estimated the 20% of new York's total room count about 25000 keys could permanently closed.
Mark City is dominating the headlines as it pertains to hotel closures, but there are corners of every market filled with distressed assets that were troubled to produce margin even before the pandemic there now obsolete and will improve the supply picture.
The pandemic is also bringing about a decline in short term rental demand as seen in recent data showing the top 25 markets experiencing significant year over year decline in inventory available.
Five of the top end assays, including Boston, New York, and Los Angeles are seeing year over year declines from 25% to 40%.
Travelers are choosing the proven cleanliness of hotels versus the unknown of short term rentals and cities and landlords are finally enforcing current regulations enforcing transparency.
The pandemic will fundamentally change the models of these platforms as we've already seen in air Bnb strategy shift to longer duration stays versus short term offerings.
These changes will be materially positive for hotel portfolios with urban gateway market exposure like Hershas.
Hersha, it's been a developer owner and operator in New York for over 20 years Post 911, we increased our development pipeline in Manhattan.
Post GFC, we acquired troubled developers hotels under construction.
This time, we have sufficient exposure to Manhattan, but expect to enjoy strong recovery in New York in the next 12 24 months.
After 911 and after the GFC, New York Route rebounded with the highest growth rates in the country for the early years of the recovery.
After 911, there was significant deletions from supply so after a steep recovery in 2003 in 2000 for the market continued to produce double digit revpar for three more years.
Post 2009, New York rebounded quickly in 2010 and continued to grow in mid single digits for three to four more years, but new supply made the rest of the cycle a bit more topic, although values continue to reached new highs.
This time as demand returns the supply story will be very different more permanent hotel closures no construction financing zoning restrictions for hotel development et cetera.
And we expect our category, killing select service portfolio in New York can meaningfully outperform.
Before transitioning to ash to discuss our expense savings and burn rate reductions I want to update you on our pending asset sales.
As a quick reminder, we announced accretive binding sales agreements on four assets in our portfolio. The Dwayne Street Hotel in New York City, The Blue Moon Hotel in Miami Beach, and the exit of the 50% ownership into South Boston hotels.
Two hotels, the courtyard, South Boston, the holiday Inn Express up Boston.
Since our last earnings call Weve had follow up discussions with each of the buyers who have asked for additional time to close on the individual transactions.
In conjunction with these requests we negotiated the right to sweep the deposits on each of the consolidated asset dispositions and a buy sell right for our JV.
Along with the extensions we've provided a reduction in purchase price for the buyers at each of these assets, resulting in total expected net proceeds of $70 million.
We remain cautiously optimistic that these transactions will close is the buyers are not reliant on material financing, but we now anticipate these agreements will close in the fourth quarter were in early 2021.
In addition to these for asset sales, we have multiple levers to pull should the impact to the travel industry remain at depressed levels into the second half of next year and we continue to explore various strategies to fortify our balance sheet.
Some investors have asked if we would raise additional common equity.
We would not.
It's hard to see a scenario, where those that level of dilution would make sense, we're more likely to sell additional hotels as a private debt market emerges in 2021.
We are encouraged by a thawing at least in the transaction markets that should gain momentum in the coming three to four months.
Our hotels are differentiated in the acquisitions market nearly all of our hotels are unencumbered of ground leases management and often brand their newly built or recently repositioned with very little capex required for the foreseeable future.
There are high quality and well located in prominent innovation oriented submarkets in the leading gateway markets the U.S.
Difficult times like these demonstrate the hustle and the accountability of our team.
We visited most of our hotels across the last few months and are grateful for the quality and character of our team at our hotels and our offices.
It's a tighter group today.
Got it reminds us that small groups of committed people can do great things.
For Jay Ash and I. This is our 21st year in the public markets, we've navigated three cycles and nearly a dozen major demand trucks together.
Pass demand shocks of proven that cities in economies Rubin rebound and America gross.
Domestic and international travel travelers get comfortable getting back on planes trains in automobiles to visit the cities that make up this great nation.
The last several weeks of showed that the recovery for lodging is unlikely to be linear and near term forecasts indicate it is difficult to pinpoint how business travel resume after labor day.
But the steps we've taken to date and our highly adaptable and flexible operating model will sustain us until we achieve a more stable environment that can showcase the value of our exceptional portfolio.
With that let me turn it over dash to discuss in more detail our cost containment initiatives burn rate reductions and balance sheet.
Great. Thanks, Neil good morning, everyone.
I'll focus the majority of my time today and the actions we've taken to date from a liquidity preservation perspective, most specifically as it pertains to newly implemented asset management initiatives that have allowed us to minimize our cash burn rate and breakeven levels as we navigate the pandemic.
Our top priorities at the beginning of this outbreak where amending our credit facility and attaining a covenant holiday, which we were able to do in short order and before our peers, but we also focused on cost saving measures to preserve our liquidity profile and to minimize operational losses.
Our franchise model and close relationship with our third party independent operators leads to significant flexibility as it relates to executing cost savings initiatives that are hotel and our ability to make these changes in real time has led to continued to lead to substantial savings for our portfolio.
In our 33 currently operating hotels, we've not only rightsized, our onsite staff, but have also employed various asset management initiative to lower our cost per occupied room, which resulted in a declining monthly cash burn rate through the balance of the second quarter.
Our operational strategy allows us to run our hotels with very lean labor models until demand achieves level wanting additional staffing.
Typically between 30 and 40% occupancy.
Well to do this by applying various cost cutting strategies, such as cross utilizing management personnel outsourcing and job sharing within the hotel and across our clusters to lower our overall expense base.
Our franchise model has also allowed us to minimize our property level severance costs through this pandemic at the end of the first quarter, we accrued less than a million dollars for these costs and we did not record any further severance costs during the second quarter and would not anticipate any further costs for the remainder of the year.
We've also zero based budgeting, our hotels and Rightside labor models with expectations to save three to 500 basis point basis points, when lodging returns to more stabilized level.
As demand begins to pick back up and occupancy level start to materialize from these low level, we will begin to phase back in staffing level. The necessary, we anticipate that the availability of labor will increase dramatically over the next few years with anticipated closures and restaurant retail and other service industries alleviating some of the increase.
It is in labor cost that we have witnessed during the past three to four years.
We've also focused on revised cleaning protocol decluttering and scaling back in room amenities, such as bedding accessory and other non essential amenities Penn.
Our menus et cetera.
We forecast this reduction should generate substantial savings on a guess supplies per occupied room moving forward.
Prior to the pandemic many of our limited service offerings included a complementary breakfast buffet for our guests, which we have eliminated for safety reasons.
At these hotels, we have turned to a more informal grabbing goes Dol option.
Which is not only been well received by our guests, but significantly brought down our cost per occupied room for this category.
In conjunction with our view sustainability team, we've been implementing additional cost cutting and efficiency measures to curb energy expenses, which will continue creating savings in margin improvement even after the impact of Koby 19.
We are reducing utility costs through operational energy saving initiatives, such as lowering heating and cooling separately for rooms and public spaces for also working closely with our engineering team on preventative maintenance procedures.
All of these measures allowed us to reduce our operating expenses by 77% during the quarter and on a long term basis, we expect many of our newly applied expense mitigation practices to extend beyond the pandemic.
Addition to expense savings measures, which we have leveraged our view platform to generate new revenue opportunities such as a green and wellness strategy that provides various sustainable meeting room options and wellness rooms.
So all of these operating strategies have also positively impacted our breakeven levels during the second quarter for the 21 comparable hotels that remained open throughout the period, we were able to effectively breakeven on EBITDA basis.
Even with severely depressed operational level as these 21 hotels had a revpar decline of 78%.
And approximately 34% occupancy.
Based on this history, we're comfortable that on a property level basis, our entire portfolio breaks even with a 65% to 70% Revpar decline with occupancy is approaching 40% and a 25% to 30% decrease.
At the corporate level, our revpar breakeven occur that 40% to 50% decline factoring Vic factoring in 50% to 55% occupancy at a 15% to 20% HDR discount.
With our current operating model, we were able to generate gross operating profit at 80% of our opened hotels during June.
And would anticipate that nearly all of our opened hotels can generate positive GLP during the third quarter.
As I mentioned with the execution of the aforementioned expense savings initiatives, we're able to breakeven at below 40% at our open hotel.
And we're forecasting that our next 25% to 35% occupancy gain should flow through at approximately 80% to the GLP line.
On our prior earnings call, we outlined our cash burn rate forecast, which was originally projected to be $11 million per month, including all hotel operating expenses corporate SDMA and debt service expenses.
During April, which we would deem to be the trough for the industry with our comparable portfolio ending the month at 14% occupancy our corporate cash burn rate actualized that tenant a half million.
Our burn rate sequentially decrease the balance of the quarter, reducing to 8.6 million for the month of May and closing the quarter at $7.8 million for June.
Our cash burn rate for the second quarter totaled $26.9 million, 18% below our downside scenario and 13% below our internal forecast at the beginning of the period.
During the second quarter.
We spent 5.4 million on capital projects, bringing our year to date spend to $16.4 million.
We anticipate a significantly reduced capex load for the back half of the year with estimated spend for 2020 at approximately $20 million half of what we plan to spend at the beginning of the year.
Since 2017, we've allocated close to $200 million for product upgrade and ROI generating capital projects across approximately 50% of our total room count.
This puts our portfolio in great shape coming out of this crisis in terms of capital allocation needs and market share gains and most of our hotels will not meet substantial capital infusion for the foreseeable future.
Last quarter discussions with our lending group resulted in a five quarter Covenant holiday with our next covenant test set to occur on June 20 at June Thirtyth 2021.
Parameters around the covenant test are yet to be set and we'll continue to have an active dialogue with our bank group as we move through the balance of the year and into 2021 as to what these tests will look like.
As of June Thirtyth, we've drawn $95 million on our $250 million senior credit facility and ended the second quarter with 23.2 million in cash on hand.
During the second quarter. We also took advantage of the low rate environment and entered into a new interest rate swap on the debt at the courtyard la west side at 3.4% to 5%.
As Dementing scenarios remain unpredictable, we continue to fortify our balance sheet through liquidity enhancing and cost savings measures to navigate this crisis.
Until then our sales and marketing teams will remain acutely focused on driving incremental revenue through unique opportunity, while our asset management and sustainability team will continue implementing strategic initiative to significantly reduce our cost structure, which will lead to a resumption of our industry leading portfolio.
Cleo free cash flow generation as the recovery progressive across the coming quarters.
That concludes my portion of the call. We can now proceed to Q in a word Jay Neil and I are happy to address any question that you may have operator.
We will now begin the question and answer session to ask the question you May Press Star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
Your question, Please press star too.
This time, a pause momentarily to assemble roster.
The first question comes from Anthony Powell of Barclays. Please go ahead.
Hi, good morning, guys.
Good question good morning.
Question on the topline business mix.
Charter portfolio what percent of a client visits at leisure versus non leisure and could you maybe talk about any seasonality issues of the mob is your piece how much that it's maybe temporary due to things like traveling nurses and doctors that.
We expect that kind of on part of the biggest evolve over the next couple of quarters.
You know hesitant to give just a wide percentage kind of across the portfolio because it's changing so much but I'd say, it's primarily in enough city like in most of our urban gateway markets. The first responder kind of health care traveling nurses the.
Set up sudden breakdowns by National guard of testing facilities and things most of that his now left the market Prime for short throughout the northeast is left the market that might be bits and bobs in a handful of west coast inside and still in the southeast but.
That has been replaced primarily with a leisure and with some of the kinds of business demand that I've mentioned before where it may still be healthcare oriented, but it's not co good related.
We generally before coded we felt that are in our urban gateway markets like New York, we had become more leisure oriented across the cycle.
As occupancy increased.
In New York City for example, and so we were at kind of 60 40 mix in our trends in between.
Corporate and leisure.
Today.
I wouldn't say, it's that much it's not noticeably are meaningfully different than that split it's probably maybe tending more towards this kinds of.
Business transient, but I would include all of the government business in that or other contracted kind of business versus the kind of transient leisure that's their folks coming in.
For friends and family.
To visit children to drop off kids, you know things like that.
But it's still just so early to give you a percentage across any given hotel or any market yet.
Got it so I guess that business travel that's.
Currently like sports genes and medical we ended up there's no reason expect that yet.
Drop off materially in the fall or are kind of change in any way over the next few quarters.
No Thats, what we don't we do not expect that.
Got it.
Just one more.
Equity comment you mentioned that you weren't issue entered the midstream equity I'm, assuming that comment is.
Depending on price, obviously wouldn't do that now let's say.
Next year, it will be up after a vaccine or whatever and your stock is higher I would you consider issuing equity then or would you still primarily focused on asset sales.
Yeah, No Anthony actually is dependent on kind of where we're equity levels. Our equity prices are but it's hard to see it today.
For the for the foreseeable future. We generally believed that we could most of our portfolio is very liquid and when there is a.
When there is a little bit more forward visibility.
We expect there to be more of a.
Debt market and in that environment, we think that some of our assets will be highly attractive for buyers. So if we needed to raise liquidity that's still our first step.
Because we could sell one or two assets at a.
Discount to pre cobot values, but.
Still release meaningful amount of proceeds without.
Suffering from dilution across the entire entity that said, if we were trading close to our.
Our replacement value or our market value for these assets, obviously anything is on the table.
And we do consider at all but but at this stage were very far away from thinking about any kind of common equity offering.
Well thank you.
The next question comes from Michael Bellisario from Baird. Please go ahead.
Good morning, everyone.
Good morning, Michael.
Just first question I think I heard you correct that you said $70 million net proceeds number for that.
Dispositions.
Thank you had maybe I think you had said 97 million before is that the right. So almost 30% discount that you agreed upon which went to prospective buyers on those transactions.
No Michael we had 97 million of debt reduction before so the original pricing on these was going to provide us net proceeds roughly 76 million.
21 million of that was allocated to the joint venture debt in South Boston, So we've effectively given 10% price reduction to the buyers of these hotels.
Got it that's helpful and then just.
Bigger picture on the transaction market at your comments neon.
Perspective asset sales what are you seeing what are you hearing from buyers and sellers in the market and what's it going rate for discounts today versus pre cobot pricing and where do you see your portfolio shaking out today relative to those expectations.
Yes, I think there's there's probably like a.
Meeting of minds around kind of a 20% discount to pre coven values.
Today kind of a 15% to 20% kind of discount theres probably would be.
More transactions at that level, if there was a debt market to support it unfortunate there isn't a debt market to support it today. So so that leads to wider discounts on perceived value just because it becomes a more on leverage to trade.
I think in cases, where there is assumable debt.
You know why you're seeing a lot of these preferred equity transactions of late is that they're stepping into existing debt, helping a investor pay it down and leaving the investor with a hope note on the back end, but the.
Giving the that the new capital and opportunity to to capture.
Economics on the equity side without having to find debt capital. So so right now it's still I think the moment. There is dead available I think there's kind of 20%, 15% to 20% discount could shrink a little bit more or at least you'd see a lot of volume at that level.
And Mike as you I know how closely you covered this market. It's just still it's still very limited the number of transactions that we can report on and trade, but theres.
But theres a lot of discussions I think where you'll see some activity in the coming two three months, our nonperforming loans in a lot of markets and.
And you will see some JV preferred equity kinds of transactions.
But I think we're likely.
A quarter away from.
From a meaningful kind of single asset or portfolio.
Equity transactions that require new debt.
Got it that's helpful. Thank you.
The next question comes from our equine of BMO capital markets. Please go ahead.
Thanks, and good morning, Yeah, maybe talk kind of staffing.
Standpoint, how much of that savings that you realize you think are permanent or in other words, when we do get more of a normalized environment well units that have fewer employees per hotel, that's the right way to think about it.
Yeah, all right. We would we just stick the operating model is going to change I mean, certainly going from 35, 40% occupancy to 60.
No need to bring back that many people you need to bring back a few but when we get back to our normal levels of 80% to 90% occupancy you're going to be able to charge much higher rates you have to provide more services bring back more staff, but things are things have just changed through this pandemic and we do think.
That operating protocols will also changed less people at front desk little more contact contact list checking.
Less people at.
Breakfast Buffets station thinks that effect that we would imagine that in general our hotels can run similar occupancy with less people going forward.
Got it and then just on the contract business sounds like you have more that than you normally what on the Bucks for for the second half of the year, how would that compared to maybe three cobot level and what kind of pricing discounts are you see for HDR discount or you're seeing in those negotiations.
And I.
I hate to always answer with it really depends but it has been it depends on the kind of business and and what that businesses serving for the hotel we will take.
More discounted rates in order to.
Compress the hotel very significantly and so if it's for.
For a larger hotel or a.
Higher end hotel, we might take.
Contract business at.
2030% discounts to what we might have last year, just to compress the inventory and give us a shot.
To drive rate on the rest of the trends in.
But with a lot of our business customers. We're also very careful not to set.
So at the wrong expectations, among our consumers. So generally with the media accounts for example, they've been at within 10, 15% of what you we would have maybe contracted with in a normal environment.
We are.
Weve uncertain hotels in it goes cluster by cluster and we play a different strategy with any given hotel in the cluster to kind of optimize demand in that marketplace, but in some we're holding rate.
While other assets, we might be willing to to win business with lower rates and if that leads to breakeven. So I'll take a example, like in Miami Beach, we have the Cadillac in the Winter Haven, we're using two very different rates strategies and going after very different kinds of business, but they are both autograph collection hotels there.
Our both high quality Ocean front assets, but we can play different strategies are in Washington, D.C.. We have the two hotels, we have opened today or we have the same Gregory which is a recently repositioned.
Almost newly built out hotel at the at a great corner in Dupont across the street from some of the highest quality new office buildings in Washington, So we're trying to kind of really preserve our rate position at that hotel, but just three four blocks away. We have the Hilton Garden Inn also very high quality box, but one that we're willing to take.
Mike.
Lower price government contract business up.
And so it's really it is asset by asset and and.
Not enough data or trend yet to share anything meaningfully.
More than those anecdotes.
Ill also add.
Yes, typically this is the time of year known as RFP season at the property level, where a lot of.
Corporate negotiated rates are put in place for the coming year this year into that whole process.
Has been pushed back and our operators are preparing for it I think it's going to be about a month later.
And.
One of the strategies were using their to follow on yields point. This is a difficult time to be setting long term rate expectations and so we've been very very sensitive to it you know if it allows us to open a hotel or generate a base of business, we're taking discounted business and if it's incremental and flowing.
I'll take that kind of business, but I think when it comes to negotiating rates for across the year, where.
And our operators are aligned with us on this we're going to really not be offering discounted rates, but offering discounts to the bar rate.
And that gives us the ability to keep bar.
Keep our bar rate.
Closer to.
Pre disruption levels and I, certainly would be discount relative to last year, but we won't have to take deep discounts on the bar rate will be able to discount off of that for our corporate folks and that allows some dynamicism and the pricing model as weak as we move through the recovery.
Thank you appreciate all the color.
The next question comes from Tyler Laurie.
Any please go ahead.
Good morning. This is Jonathan Jason gone for Tyler Thanks for taking our question in your drive to leisure markets. Specifically can you just provide some color in terms of OCTEON weekend compared to what you're seeing on weekdays.
Sure.
You know.
I'll leave it with color rather than.
Data, which we can follow up with you on but the weekends.
Have been much stronger performers both on occupancy online and on Aer with our drive to resorts were finding that our weekends, we're getting very close to pre covert levels on aer. So far and now it's looking like we're going to exceed 80 are in the coming quarter on weekends for our drive.
Resort properties I think thats a function of this environment that we're in today and the lack of alternatives for leisure travelers domestically.
And.
And so.
Anything else, we could share there it's yeah and then on the weekdays weekdays. It's it's rates are plummeting, but harder to maintain that kind of rate integrity, because occupancy is still building.
And then that's going to that's I think is is something that just with each week you get more comfortable.
Going out to.
Getting on getting in the car and going to three hours away in checking into a hotel we saw that pick up very quickly in northern California throughout April and May throughout San Francisco and Silicon Valley. They were looking for places to go.
In L.A. on the other had its been a little bit slower, but today. There is actually have really active effort locally in Los Angeles among residents to encourage staycations area hotels, but also up up and down the cost we have to kind of offset the lack of international travelers.
In Southern California, and we do expect that some of this leisure travel will start to happen a little bit more than it has so far on the weekdays.
In on the East Coast, It's also been similar kind of.
Occupancy building through the week still probably.
2030%, but by the weekends, we're getting the occupancy up to the seventies eighties.
Even higher in some cases and when we do that than 80 arc and get to prior levels.
I think it's a function of weekdays weekend and it's also kind of how long the hotels been opened because it's like in this environment post cobot, it's like opening new hotels like as if were builders again and ramping up.
And with each week I Hotel is open there there are really building HDR capability I think for our four hotels that were opened throughout this last quarter.
80 are in the beginning was like 139, and then it ranged up I think by June Thirtyth, we were at 290.
And so thats a.
What's that last 290 was that a weekend that might have been a week, Ed, but big ending two weeks ending okay. There's a weakening yen.
So so you see that just there is the the ramp up of an asset in a drive to resort market drive to market. That's that's leading to 80, our growth, but but for sure to your point the weekends or.
Our.
Providing confidence to us to keep some rate integrity on the weekend as well as occupancy builds.
Okay. That's great I appreciate all the detail there that's all from me. Thank you.
The next question comes from Collette Niguel of Jefferies. Please go ahead.
Hi, good morning, gentlemen, thanks for taking the questions.
The question is really around you know the data around Colgate and the recent spice are now starting to head back into right direction. I'm. Just wondering if you guys are thinking about contingency plans as we head back into the fall and.
Back to work back to school colleges opening up how you guys just thinking about the contingency plans if things start to spike again.
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Yeah I.
I think well I mean, it in the end of the day like our contingency we always have in places that we can with our operating model.
It takes a three to five days to open a hotel it'll take US a couple of days to close a hotel. So worst case scenario that is what we would do.
If demand drops so far and we don't have enough contract business to breakeven at the gross operating profit level.
Then we would we would be comfortable suspending operations again on individual assets, we don't suspect that that will happen because weve been able to find the kinds of business that we think will allow us to kind of continue to pay down fixed costs and ramp but that is what.
We would do if there was a big.
Drop off again in demand.
Yeah in Miami is a market Miami Beach, where they are clearly was a.
Flattening.
Of of demand in late June early July around the July 4th closures and throughout this month has been very choppy with the hurricanes and the hurricane warnings and and the headlines around the case counts and things, but it didnt fall off to the level where.
It was better to close the hotel.
Could it happen in the future very well could and Thats, what we would do that would be our contingency to deal with that.
And clearly that makes very much as I mentioned, we don't really.
Foresee, adding a lot of employees for the next quarter and even though we would anticipate some increases in occupancy.
This point all the tough decisions that we needed to make we have and we don't think staffing levels need to change very much until 2021.
Got it thank you.
The next question comes from Chris Woronka Deutsche Bank. Please go ahead.
Hey, guys good morning.
Well I wanted to ask you how much work you've done to maybe figure out in home in markets, where you're continuing to kind of build occupancy.
Much of that as a benefit from other hotels, possibly remaining closed I guess kind of secondarily to that.
Expect a any kind of negative impact as more and more hotels open.
Yes, Chris.
Absolutely, there's we're definitely benefiting from.
So many hotels being closed today in this super low demand environment.
It is really helpful.
To have a lot of hotels closed.
As we mentioned in some of our remarks, we do think there will be a significant number of permanent closures across.
York City in particular, but other major cities as well.
But.
But we do expect that the kind of short term closures, which our hotels that can't break even at these low levels of occupancy they will reopen.
As the year progresses, as well as into next year, and so we'll always be dealing with kind of new hotel supply coming online or existing hotel supply reopening across the many across the several upcoming quarters.
The impact of that will likely be I think the openings will be commensurate with the amount of demand in the marketplace and so.
We we expect that when they open their opening for the for that much more business being in the market and that will be able to find.
Better business or additional business at that time, but that will continue to be something across the next 12 to 18 months, but I wouldn't call a headwind, but I would call a reflection of.
Have a rebounding market.
Yeah and question I think in the early part of the recovery just as these hotels open. We'll we'll just remain very very focused on market share in driving as much share of the recovery as we can and I think just being open early and on the ground.
And establishing some of those.
Channels will be helpful.
You know it might make rate sluggish until you get back to full openings.
Auto market by market basis, but.
It won't be wont be dissimilar from some of the dynamics, we saw in New York last after 911.
Right.
Okay.
Helpful. There and just to kind of stay on the on the New York fee.
I certainly agree with your comments of your.
Your forecast that.
Isn't about supply is going to exit the market I guess I guess, the bigger question right as kind of on the demand side and I know people underestimate in New York for long time and it's.
Over long period of time, it's been proven wrong, but yes. It does feel like there is some differences here right with the with the work from home and.
Things like that and kind of be Densifying and all this other stuff. So I mean, I know, it's a asking for a crystal ball here, but I mean, what kind of concerns do you have about longer term demand picture, especially given where the where the rate rates of have been it maybe difficult.
For some folks to make it make it profitable.
Yes, I think to the last point you just raised I think that will lead to to meaningful supply reductions you know just the fact that it is a harder market to operate in than it's been for the last five years and and now there is a.
No restriction on hotels converting back to other uses as you remember in the Latin this past cycle. There has been a lot of.
Restrictions on that actually happening. So we do expect there to be a lot of hotel that won't reopened but on the demand side.
I think it's <unk>.
Thank you.
You it's hard to.
Momenta fear, it's hard to.
Hard to remember all the great things about the city, but.
After 911.
There was real fear about.
About life and death immediate life and you are you know and there was degree there was a send in the air.
There were just so many people have moved out of the city and it took about a year year and a half for it to.
To really come back very strongly and much better than it ever it had been so we look to past cycles.
You hear about.
New York or our major gateways in the U.S. are similar to the ones in Europe really in and these these cities all around the world of have gone through wars, and Pandemics and they always come back relatively strong like I think on the corporate picture. It's you know on the corporate picture it will likely be slow, but but I think the most.
And it turns it turns quick I mean, just think of the office inventory in New York that's been under construction.
In the Densifying environment, there are places that people will be able to.
Spread out and there are there are new buildings being built throughout the city and who are the top buyers of and Leasers of New York City real estate or take L.A. same thing.
It's all the largest tech companies in the World, It's Google its Facebook Amazon since the co bid.
There's been.
I think probably more of the leases signed in New York and like the Farley Office building purchase by Facebook talk around the Neiman Marcus going to Facebook to in the Hudson yards. These folks are still taking down space.
Because I think they see in the long term these businesses do require the talent.
And energy and.
And global kind of connectivity that these major cities provide.
And so that continues to give us confidence to see.
New space being taken down that being tenanted.
And so that gives us some confidence on the corporate side on the events side clearly.
It is concerning for until there is.
More congregating and then you have the UN back and you have some of those things back its will it will be tougher without that compression that likely requires a vaccine or something or very significant therapeutics that will.
Help us get that lift.
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But.
I'm sure that the.
Some of the New York City office.
Guys have have some more succinctly answers for you, Chris, but but there's there's reason I think to be optimistic on the corporate side and on the leisure side. It's just it's a bit of time and there's a time lag to all the headlines and and the concern.
But I think the case counts being down now for months in the north Eastern cities.
I think it will will lead to more leisure demand then I think it'll be noticeable in the coming months you need more demand generators open obviously, Washington, DC, you need the Smithsonian institution to be open.
In New York, it'll be great when you have.
Theater again.
But until then you do have restaurants and bars you do have just the street life, which frankly, Chris you're in New York right.
It's pretty pretty impressive down in in the West village in the East village Soho Tribeca.
There is activity in life again.
I know, it's still pretty tough in Midtown west in Midtown East.
In Washington, DC, you have endured dining again, so you're seeing youre seeing a pretty good mix of people, you're seeing folks dropping off kids you're saying.
Locals, you're seeing the first business meetings happening outside or in these kinds of spread out restaurant facilities and and so I think there is some of that leisure life coming back as well.
Long window, but.
Those are our thoughts, yes, very very helpful. Much much appreciate it thanks guys.
Our next question comes from Kyle pneumonia of B. Riley. Please.
Please go ahead.
Hi, This is Kyle on for Brian My her.
Just had a couple of questions. So first off you spoke on the last call about group business being reschedule.
I wanted to know if you can give us an update us if those have been substitute subsequently canceled or pushed out further as the pandemic persists.
No we have only four hotels that that derive meaningful group business like in our portfolio pre coded.
Several of those hotels, we've decided to remain closed for longer periods of time because.
Our expectation is that there isn't going to be.
That there will be cancellations on a lot of the group business that we had on the books and that we would have opened for.
It's just not a huge part of our business. So we don't have a lot of data to share, but most of it was cancelled and pushed back to September October and depends market by market an asset by asset, whether we think that that will actually come to fruition or not.
Well, we've recently booked across the last two to three months, we have lots of kind of confidence on in the short term, but but things that are just continued to be pushback from March to middle of the summer or too early fall.
Less confidence on.
The hotels that we have opened that have group facilities. Today, we are touring people through much more than we ever have in the last 100 120 days.
Weddings will pick up there's no question about it that we will have.
A lot more social business and 21.
And.
And on the group business, we're just seeing the first bits of kind of new corporate kinds of group opportunities but.
But I think some of our more group oriented peers will have better data to share.
Great. Thanks, and then any thoughts on the timing and strategy to reopen bars and restaurants hotels.
We're doing it on a case by case basis.
And depends on kind of local regulations and.
The safety that we can ensure our guests as well as our team members.
But in certain cases, it makes a lot of sense. So we've opened up at the envoy in Boston we.
We have.
Iconic rooftop there.
That has has been.
A top destination for many years, but if you'll remember we spent some time last year expanding that space, adding a kitchen.
More overhead cover and so we have opened that facility up and we're seeing very strong production, there and it's very much beverage oriented.
Which is leading to higher profit margins than we might expect from.
Food and beverage restaurants and bars pre coated.
That will be probably our biggest restaurant and bar contributor, but we have also opened up at the sanctuary Beach resort, where we're providing.
We are getting rates in the 400 506 hundreds.
A night and there is less to drive meaningful profit, but it's to provide.
The amenities that our guests are craving and they are looking for.
For.
Notable food and.
And beverages that we've opened up there at parrot key down in key west the month of June we actually did better FNB production food and beverage production than we had prior year.
In July it looks like we'll do the same so were.
There we are case by case method basis, we're opening up restaurants and bars.
In the most of our urban gateway markets, we've been more hesitant to do so until there is.
Just more volume.
And cities truly open up but I think in a city like Philadelphia, It will likely be towards the end of the month that will start to provide.
Dining at least at Scarpetta, if not look qual.
And in Miami Beach for example, where we have a strong partnership with at least operation there they've opened the day, we opened the hotel and so we've been able to provide.
Foodservice at the beach as well as.
By both of our pools.
Yes.
But the biggest one is the on boy that we started with.
That's helpful. Thanks for the color that's all for me.
This concludes our question and answer session I would like to turn the conference conference back over to management for closing remarks.
No. Thank you for your time, everyone with no more questions, we'll just.
Well, we'll stand by for after your other calls or whenever questions come to mind. Please feel free to reach out to us. We're all in the office here in Philadelphia, We look forward to speaking too soon.
The conference now concluded. Thank you for attending today's presentation you may now disconnect.