Q2 2020 Summit Hotel Properties Inc Earnings Call
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Bye and welcome to Summit Hotel properties Q2, 2020 earnings Conference call.
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I'd now like to hand, the conference to your host Senior Vice President Finance, Adam Woodrow Sir. Please go ahead.
Thank you Lucky and good morning.
I'm joined today by Summit Hotel properties, Chairman, President and Chief Executive Officer, Dan Hansen, and Executive Vice President and Chief Financial Officer, John Scanner.
Please note that many of our comments today are considered forward looking statements as defined by federal Securities laws.
These statements are subject to risks and uncertainties, both known and unknown as described in our 2019 form 10-K, another actually see filings.
Forward looking statements that we made today, our effective only as of today August 620, 20, and we undertake no duty to update them later.
You can find copies of our actually see filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call on our website at www Dot FHP reach dotcom.
Please welcome Summit Hotel properties, Chairman, President and Chief Executive Officer, Dan Hansen.
Thanks, Adam and thank you all for joining us today for our second quarter 2020 earnings Conference call.
The second quarter was extraordinarily challenging for the industry demand it traded to historically low levels and the typical booking window shorten considerably.
Yeah, we are encouraged by the trend of consistent week over week occupancy increase that are hotels throughout the second quarter and into July.
Revpar declined 83% during the second quarter, but improve sequentially each week throughout the quarter as June Revpar declined 75 per cent compared to the nearly 90% decline we saw in April.
When excluding the 15 hotels that were closed at various times during the quarter.
When she was approximately 46%.
Occupancy was over 41% across the total portfolio in July nearly 34 percentage points higher than the first two weeks of April when demand trough.
And our preliminary July results point to 67% year over year decline.
In addition to the increase in occupancy our market share gains were substantial in the quarter. As we finished with a 143% Revpar index more than 20 percentage points higher than the first quarter nearly 30 percentage points higher than the same period in 2019.
Weekends began to perform much better than weekdays as the quarter progressed, driven by relaxation of the mandatory stay at home orders, resulting in an increase in leisure travel, particularly and drive to markets in June.
Weekend occupancy exceeded weekdays by nearly 10 full percentage points, averaging over 41% occupancy for the month and resulting in a 30% premium to our weekday revpar.
Weekend occupancy at our hotels located end markets, we considered as drive to surpassed 50% in June and this trend has accelerated because these hotels achieved 58% occupancy during the weekends for the month in July.
Our second quarter results and particularly at the trends we saw in June and July substantiate the widely held view that leisure travel broadly and drive to leisure demand more specifically is leading the recovery currently.
Our extended stay hotels, which comprise nearly a quarter of our total guestrooms were relative outperformance during the second quarter, finishing with 38% occupancy in a 76% revpar premium to our overall portfolio.
Our extended stay hotels posted an average occupancy of approximately 40% in June and are preliminary July results indicate or extend and hotels extended stay hotels achieved 60% occupancy for the month.
Our suburban and airport hotels, which comprise more than a third of our portfolio Guestrooms. We're also performers during the quarter posting occupancy is up 37% in 35%, respectively also driving a premium to the total portfolio.
Urban hotels had been a laggard for the industry in the recovery. The we're beginning to see signs of improvement as July occupancy finished nearly 1000 basis points higher than in June in urban portfolio. The largest single month over month gain since the onset of the crisis.
Well, we have begun to add back labor at certain hotels consistent with the improvements in occupancy we're still operating with an incredibly lean staffing model as we were averaging 10 ft East per hotel as compared to approximately 30 fts per hotel prior to the pandemic.
In addition, our teams continued to have an intense focus on creating an environment at our hotels that prioritizes the health and safety of our guest.
Changes in regulatory protocols and brand standards continue to evolve and we're fortunate to have the opportunity to work collaboratively with our brand partners and management companies to offer solutions to some of these important but complex issues.
Finally to preserve liquidity, we have continued to delay on non essential capital expenditures for the remainder of 2020, along with common dividend distributions, which combined preserve nearly $30 million in the second quarter and will preserve $60 million of cash for the balance of the year.
I will let John speak to the specifics of our balance sheet, but with approximately $270 million of current liquidity in a significantly reduce reduced monthly cash burn rate. We currently have over three years of liquidity to navigate what could be a prolonged recovery.
With that I'll turn the call over to our CFO John Stanik.
Thanks, Dan and good morning, everyone. In June we amended our 200 million dollar joint venture credit facility that allows for the temporary waiver financial covenants through March 30, Onest of 2021 and modifies the testing of certain covenants through June Thirtyth of 2022 to accommodate what may be more gradual recovery. This.
All the amendment of our corporate revolving credit in term loan facilities, which provides for a $150 million of additional borrowing availability.
Combined with a $120 million of unrestricted cash on hand, we currently have approximately $270 million of total liquidity.
These two amendments address more than 85% of our current pro rata debt balance and position us well to withstand a prolonged period of low demand.
Today, our weighted average interest rate is slightly under three and a half person and weighted average term to maturities approximately three and a half years with no maturities until November of 2022.
The efforts our asset management team made to mitigate the sudden demand shocked that began in the middle of March, including Rightsizing staffing levels and adjusting service and amenity offerings resulted in strong retention of just over 40% in the second quarter.
This has reduced our monthly cash burn rate from between 10 and $12 million per month to approximately seven and a half million dollars for the month of June and closer to $7 million in July.
At these levels are projected liquidity runway has increased to approximately 38 months, adding over a full year of runway since we reported first quarter results.
Additionally, our portfolio breakeven revpar at the hotel level that's between 35.
We nearly met the low end of this range in June and exceeded the high end of this range in July.
Our efficient operating model, which is less labor intensive and oriented more towards transient and leisure demand has allowed us to keep the majority of our hotels open even during the strictest periods of mandatory lockouts.
As of today only one of our hotels remains close our holiday Inn Express and suites in San Francisco.
At demand continues to recover we remain focused on adding back labor services and amenities in a disciplined manner to control cost while continuing to provide a high quality guest experience.
We have not reinstated our full year guidance ranges and do not expect to do so this year, while we're pleased with the improvements we have seen throughout the portfolio over the last three plus months, we're still operating in a highly uncertain and challenging environment.
Leisure travel has been the primary source of demand for the industry over the summer and like many we're cautious about backfilling that demand in the fall and winter months. This year that are naturally less conducive to personal travel.
Our expectations for a meaningful return of corporate travel had been pushed back and why we would not preclude a pickup from today's low levels and the sporadic nature of demand are working assumption is for the rate of improvement we saw throughout the summer months to slow and ultimately the passage of time, a medical solution to the virus or a combination of both will ultimately lead.
To more robust levels of travel.
There's been much conjecture regarding new normals, and structural and secular declines and travel, particularly business travel on a more sustained basis coming out of this crisis.
While we clearly do not have a crystal ball, we remain long term believers in People's Nate desire to gather.
Enjoy the experience will side of life, and ultimately travel and we believe our diversified portfolio of well located hotels with efficient operating models is poised to be an outperformer going forward.
And with that we'll open the call to your question.
Thank you as a reminder to ask the question you any to press star one on your telephone.
Withdraw your question press the pound cake.
Please standby when we compile the can mean a roster.
So first question, we're comfortable I know Michael Bellisario from Baird you may begin.
Good morning, everyone.
And Mike.
Good first talk maybe a little bit our brand standards, what's what Doug.
The brands and your operating partners.
We're allowing you to do in terms of flexibility and then.
When do you see that flexibility maybe.
Yes switching back and.
And becoming more stringent so to speak of as occupancy continues to pick up.
Sure Dan, Let's look at I think it's still evolving theres been a lot of work being done around cleaning to protect the you know the safety of our guests and our employees. So.
There's a lot more frequent cleaning being done and public spaces.
We're not planning stay overs unless requested we're trying to position sanitizing stations for hands in high traffic areas, the food and beverage offerings have generally been grab and go and some of our markets that we're getting hierarchy.
I've been see we're starting to bring back some additional level of offering.
I think what we're trying to work with the brands and the management companies on as occupancy comes back what is the right.
Mix amenities and staffing to do that so I think that is continuing to evolve.
Our hope and expectation is that.
Our highly efficient model as it sits today becomes even more highly efficient with procedures and offerings that stelmi guest expectations and give them a sense of.
Safety, but also kind of rewards them.
Much closer to some of the things they were.
Liked about the consistency of the brands in the past so hopefully that's that's helpful.
It is thanks, and then just switching gears just on the transaction market.
What do you guys thinking in terms of potentially selling assets.
So, yes, raising capital and bolstering the balance sheet and then also what you're seeing a price based on what's in the market today.
Sure.
I think it's a although early for.
Tactical execution of acquisitions dispositions I think people are still trying to find out value and.
Forecasting is.
Challenging in a in a good environment and even more so today I.
I would like to be in a position too.
Take advantage of opportunities as they as they come up where set certainly not opposed to selling assets to further right price in the right market like our portfolio today.
But.
As we look out in the future clearly we've got to a great partner with GE I see.
Got a history of doing creative things with structure to create value for shareholders. So.
Nothing currently I would say, but certainly we remain patient and interested.
Thanks, and I'd, just one more housekeeping item on that point, you guys had a contract termination payment during the quarter was that related to a.
Disposition from a prior year was that something that fell apart during the second quarter.
That was that disposition several years ago.
Have a small asset with a brand that we.
We're anticipating being able to reallocate.
That into a new contract, but we're never able to do so.
Got it thanks.
Thank you. Our next question is employment in American from capital One you may begin.
Hey, guys good morning.
A lot of the lodging Reits like you have been successful at reducing cash burn.
Be it.
Opening up more hotels.
Predominantly it seems like it's on the expense that.
Im just wondering if you can go into a little bit of detail on.
Kind of the top three or four things that you guys are doing that you either didn't think you could you before or or are doing more efficiently.
And any kind of information.
In that regard would be helpful.
Okay.
Yes, Hi, Daniel if John look I'm not sure that there is anything that we were we were on clear uncertain that we can do I mean, I think we have been successful reducing the cash burn I mean first in first and foremost yeah. That's a result from just better occupancy in occupancy improvements over the course of several months I think we've done a really.
Good job any the team has done a fantastic job of continuing to run with with a really efficient really lean workforce as you know we reduced our ft counts from call. It early March levels to by about 80%, we're still running with hefty counts down 70%.
From from kind of peak, so I think that I think from a retention perspective and expense control perspective, we've done a really good job continuing to operate hotels and what isn't a normal environment, but a higher occupancy environment still with very lean models and I guess the last one point I would make I think for revenue management perspective.
The teams again done a really nice job, we're running really high index is 140% plus revpar indexes.
Kind of finding unique pieces of business across these markets to help create some occupancy in an environment, where demand continues to be very low.
Appreciate that.
In terms of your markets.
Forming up into July as co vacation.
Creep back up on did you did you see.
Nicole deterioration or where did you see deterioration in your portfolio could you.
Pinpoint it that it would.
Mainly sort of coastal cities urban locations or what sort of all the same more uniform drop off regardless of.
Sub location or market.
Yes, So I would first thing I would clarify is we really didnt see a pullback. We we have seen a sequential demand increase it ever every week really since the middle of March which is encouraging what I, what I would describe it as we have seen kind of the rate of growth of the rate of improvement slow as we got into July.
I think there's a few things going on there clearly some of that is driven by a resurgence in cases, particularly in sunbelt markets of of the virus and we did see particularly around the fourth of July where we had relatively high expectations for the portfolio markets like Fort Lauderdale for example, where they closed the beach and we had less short term pickup in that Mark.
Than we otherwise what we've also seen more hotels opened particularly full service hotels, so that kind of shadow supply here or new supply. If you will that's come on his career is absorbing some of the incremental demand and then look we're just more naturally operating it at higher levels of occupancy there still low from historical context, but when we look at sequential improvement.
With the bar is higher because we are operating at somewhat higher occupancy level. So I think there's kind of three or four factors that are all feeding that again, we havent seen a pullback in demand just really seen more of a slowdown in the rate of improvements.
Okay, Great and my last one are you seeing any indication I think you mentioned that briefly about business the business traveler business transient.
Is it happening more in our local or regional level.
Small businesses or are you seeing that I guess, however, small that return is it sort of uniform.
Between large multinational how is that.
Like the created if at all.
Yeah, I would say the corporate demand that we've seen as I think as we described it in the in the prepared remarks as sporadic its unique its.
Its local I, probably can describe it as you know kind of sub market our asset specific today I wouldn't see say that we've seen any type of broader general increase of corporate demand as we said I think our expectation is for when that comes back has probably been pushed back to some degree it's better than it was I mean, we're certainly off of of trough levels.
We saw late March early April, but I wouldn't see we believe.
Thanks.
Resumption of corporate demand.
Some of the unique pieces of business that we have.
Which would certainly help.
Thanks, Ed.
Thanks Neil.
Thank you all next question will come offline Austin Wurschmidt Keybanc you may begin.
Yes, hi, good morning, everyone. I was wondering if you guys could provide an update specifically on on the three mezz loans that are fully funded as to kind of next steps.
Following the end of the 90 day interest payment deferral that I believe lapsed and mid July.
Yes, so we've extended the deferral period through September 15th of this year I think as we indicated on the last call the expectation is.
There are extension options contemplated in the deal, but both for the option in the two loans that are in place for the deals I think at this point our expectation is that.
We will those exercise those options will be exercised and will.
Continue to address it as we move forward through throughout next year.
Got it appreciate the update and then just as you think a little bit longer term you know with with some of the talk of the rise of of the suburbs and what's going to happen with some of these urban centers.
Post co bid what are your your high level thoughts around portfolio positioning and any any changes in strategy.
You'd consider on the other side and then on top of that just curious how you think.
You know as supply coming out of this you know what is sort of the supply picture look like from a geographic and sort of sub market perspective as well.
In Austin its Dan.
Look I think our portfolio probably more than anybody else has evolved.
Continually to address first of all opportunities and second of all shift in guest preference.
I think as as things have changed here.
I would we.
Shy away from urban and try to focus more on suburban it's really more of an opportunity set is there something that is impaired gives it an urban market that could act more like a suburban market. For example, we have a few markets today that are very core urban like Atlanta.
Yeah.
Charlotte and Portland that have had very strong weekend demand recently.
And so they're acting a little bit different than than maybe your typical urban hotel, Mike. So I think each one has to stand on its own.
And we've always looked at a mix of business and leisure demand. So I wouldnt say that it was it has categorically changed our our view on the future, but we'll continue to be a factor.
When we look at supply I think.
There is still a fair amount in the pipelines my sense is that many of those will get opened.
If they haven't broken ground yet my sense is they will continue to get pushed off.
Construction starts.
I think broadly have slowed but.
Material prices are really mixed lumber is still incredibly high along with copper so.
Labour hasn't quite broken yet so I don't think as as a whole we'd expect supply beyond what is going to get pushed out over the next 12 18 months will be much of a factor, which I think bodes well for us and our locations.
No I appreciate the thoughts and last one for me and sorry, if this overlaps a little bit with Neil's question, but the thousand basis points of improvement in urban markets that you referenced into July from June what was the biggest driver of that improvement do you think it's it's that sticky demand in that Theres continued.
I guess upside in those locations as you look out into the whatever booking window. It is you do have and visibility that you do have.
Yes, sure look I think we had a couple of unique markets.
Probably most of first so first of all I'd say most of the improvement has been driven I think as we mentioned on the weekends. The two markets that probably stand out more than others or Portland, Ironically enough and Charlotte to a lesser extent. So we have seen improvements as I mentioned earlier.
We continue to feel good about.
The booking windows very short, but the data that we do have on the books I think we feel good about it theres, obviously concerned about what happens post labor day, particularly in some of these these core of our markets, but the trends in the urban markets, particularly in part because they started from a lower bases have have actually improved quicker than we book weather wise scenes I think.
We feel good about what's happening a lot of Thats driven by a couple of a couple of these markets Charlotte in Portland in particular.
Okay. Thanks, Jeff.
Thank you My next question since I joined the Bill Crow from Raymond James maybe again.
Thanks, Good morning, guys.
Going back a few questions just.
Little bit more detail.
Headed of supply.
Might have been shut down how much of that is still shutdown.
Bill, It's Dan I don't know that we've got to a sense for either a percentage basis.
As we look out in the market I think the majority is has been open and operating at levels with limited staffing.
As ours, so I wouldn't say theres a material effect on closures out there at least from the data that we've been able to see.
So there's there's not a lot of Phantom supply to you.
In the next few months.
You know billet one thing I would just add to that is I think when you look at across our competitive sets you know, particularly as the Smith travel to find competitive sets as Dan said most of those who have remained open there have been essences, where you've got particularly urban markets, where you got some full service bigger box hotels that have remained beverage remained close that.
The timing of that of those reopening is are uncertain, but I think again I think for the most part most of our hotels and most of our competitor directly competitive hotels have stayed open to the majority of the crisis.
All right.
Yes, John you talked about slowing the growth of demand.
As the number of cases ticked up western and see a little bit better data from the Ts nave front over the past week or so I'm just.
Im just wondering as the cases stabilize.
And maybe there's a passenger time, we're we're folks decided they need to travel but are you seeing an uptick.
More recently, especially in some of those markets in the southeast and southwest that the kind of I'll, let us into the slow down about 30 days ago regional.
Good.
Yes, we havent seen so the first thing I would say is we really didnt see a huge fall off we solve.
You mentioned kind of this slowing of the rate of improvement I think things have held stable. We continue to see improvement. We continue to have kind of a sequential week over week improvement in demand. We're only kind of five days and August I think what we've seen in August, particularly the weekend. The first week end of August continue to be strong.
So I wouldn't say, we've seen a huge acceleration by any means but I don't think that again at some of these days get past kind of peak cases, and as you said that the TSH stats continue to prove we have seen the continuation of very solid leisure demand, particularly on the weekends.
One more question for me.
Slugs service in your portfolio in particular has.
Got it advantage that it hasn't had exposure to union labor.
But with the city councils.
Taking a very pro union statements in this reopening process.
I'm, just wondering how big a headwind.
That's going to be and in your markets, especially west coast markets Chicago.
Also.
Bill It's Dan.
I do think it as a headwind obviously it at affects us much less we since we have one Union hotel.
But does negotiations continue to go on and I think everybody is trying to find that right balance of.
What that that cleaning standards should be in time allotted and benefits and an unfortunate has a lot of moving parts there, but I do think that that will continue to be headwind, especially in the larger more union dominated markets.
Okay. That's it from me thank you.
Yes.
Thank you.
Our next question will come from the line of Wes Golladay from RBC capital markets you may begin.
Hey, guys that Steve on for Wes just a follow up Austin's question about the mezzanine loans those three hotels.
Are they open and if they are are they generating operating results comparable to the other hotels in your portfolio.
Yes to both their their open and I'd say, they're generally performing in line with with the rest of the portfolio.
Well I think that's all that.
Thank you.
Thank you.
And I'm not showing any questions at this time I like to turn the call over to.
Sorry, Dan Hansen for closing remarks.
Thank you I really wanted to close with a couple things first of all.
I do believe and and I believe quite strongly that.
We're all social beings, we want to see people and have experiences that hasn't changed in fact, I think the takeaway from all this will be a validation.
That are not zoom, maybe part of the future, but it is just apart and it is just a tool and that social contact is critical to health happiness and I don't think Thats, just a leisure comment either I think business is done with relationships that develop.
Over many years and that can it kind of activity.
Many times, just goes beyond and interaction or a deal or structure and into something much more so.
Im very bullish on travel on the industry and and particularly bullish on summit.
And I wanted just really to summarize once again why why we are so confident in our future.
First.
Our flexible operating model has shown one of the great strength during this this crisis.
Our cash burn has improved by nearly 40%, providing three plus years of runway.
We do continue to gain market share showing the strength of our operations team.
We have no debt maturities until late 2022.
Properties, our young there renovated and need minimal capex and lastly, but most important you've got a management team here at that some of the Chicken Trust. So I. Appreciate you dialing in today, we look forward to talking soon hopefully that will be in person.
I have a terrific day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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