Q2 2020 Park Hotels & Resorts Inc Earnings Call
20, <unk> earnings conference call.
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As a reminder, this conference is being recorded I would now like turn the conference over to your host Ian Weissman SVP corporate strategy. Please go ahead.
Thank you operator, and welcome everyone to the park hotels and resorts second quarter 2020, <unk> earnings call.
Before we began I would like to remind everyone that many of the comments made today are considered forward looking statements under federal Securities laws as described in our filings with the FCC. Your statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed.
You're not obligated to publicly update or revise these forward looking statements.
Addition on todays call.
We may discuss certain non-GAAP financial information such as adjusted EBITDA you can find this information together with the reconciliations to the most directly comparable GAAP financial measure in the mornings earnings release as well as an 8-K filed with the FCC and the supplemental financial information available on our web.
Site at PK hotels, and resorts Dot Com. This morning, Tom Baltimore, Our chairman and Chief Executive Officer will provide an update on parks current operations. In addition to his thoughts on the industry as a whole Sean Dellorto, our Chief Financial Officer will provide a brief review of our second quarter results as well as.
An update on our balance sheet and liquidity.
Following our prepared remarks, we will open the call for questions with that I would like to turn the call over to Tom.
Thank you Ryan.
And welcome everyone.
I want to start by saying that I hope all of you and your families from a safe.
Healthy and well.
I would doubt.
Last five months have been the most challenging period, the lodging industry has ever faced.
Travel grinding to our virtual standstill.
Bid mandated stay at home orders unrestricted travel policies across the world.
Well the U.S. began a gradual reopening in early June.
With my team cases continue to rise and would widespread uncertainty travel demand remains largely depressed.
What sorts of dispensing practices is still very much the norm.
Businesses have encouraged and poised to remain at home.
And many school districts, we'll implement virtual or remote learning for students, who both of which are major impediments to business travel.
We don't expect a meaningful increase in demand until medical solutions, including vaccines and therapeutics are in place.
We are encouraged by the global race underway and the pace of vaccines in development, including several that are moving into phase three trials.
Despite these challenges.
Our team remains committed.
To executing our action plans to mitigate or losses and bolster our liquidity.
We move quickly in March and April as we suspended operations at 38 of our 60 hotels.
Dramatically reduced our capital spend by over 75% and.
And drew down our $1 billion from our revolver.
We further solidified the balance sheet by amending our corporate credit facility to obtain covenant relief and substantially increased our liquidity with a 650 million dollar bond issuance.
So the combination of these actions we ended the quarter with over 1.6 billion of liquidity available.
300 million dollar increase from the end of the first quarter and reduced our monthly cash burn rate to 65 million, assuming all hotels have suspended operations.
Or a 23% of reduction from our original estimate.
This equates to over two years or runway under the most severe circumstances, which keeps park well positioned to navigate the disruption from the pandemic.
Well, we recognize the situation remains extremely fluid as stay at home and travel restrictions continue to fluctuate.
Our focus has shifted to the recovery phase as we begin the process of reopening our hotels.
Generally speaking.
There are a number of factors reconsider and determining winder reopened a hotel and at what capacity, including state and local ordinances.
Demand in booking trends airlift capacity.
The potential to consolidate operations with neighboring park hotels.
And ultimately the cost benefit of opening.
Versus remaining closed.
Accordingly, as restriction started to ease in June we reopened 10 hotels during the month, followed by another 10 hotels and in July all of which were done relatively quickly and with minimal startup cost.
Currently we have 42 of our six hotels open.
Accounting for approximately 53% of our total room count.
Over the balance of the third quarter, we expect to open an additional 11 hotels, bringing our total open capped at 53 hotels.
By September 30, or accounting for almost 80% of our total room count.
And with most of the remaining suspended hotels opened by year end.
Turning to broader operating trends, we've seen pressure across all segments end markets.
Leisure transient and drive two locations performing better on a relative basis.
Why remains one of our more challenged markets with the state extending its mandatory 14 day quarantine restriction for travelers through at least.
September the first well also requiring inbound travelers beyond that day to provide proof of a negative code at 19 test.
On a positive note.
Garbage Japan recently included a why on an exclusive list of just 12 countries and regions they've designated as say travel partners with Japan accounting for more than 1.5 million visitors to a why in 2019. This is an important step forward, giving how meaningful.
Japan is to Hawaii tourism.
In 2019 inbound travel from Japan accounted for nearly 19% of total demand across our two Hawaiian hotels.
Turning to San Francisco, which is among the most challenged hotel markets on a country.
The mayor ordering all hotels close with the exception of those housing first responders.
And a central workers.
The outlook over the back half for 2020 remains challenged with all major city, wides out or cancelled or scaled back and with the majority of the city's largest business transient players electing to keep associates at home for the foreseeable future.
On the group side, we're working to Rebook counsel events.
Our most are targeted in the second half a 2021 or beyond at this point.
South where it was a relative bright spot in the portfolio with both of our key west hotels and the World Palm Hotel in Miami opening in early June.
Demand trends have been relatively healthy for the drug to leisure properties. The documents you trending in the 30% range from Miami in order to 45% in key west for the month of June.
Notably in key West HDR impressively remained flat year over year.
Finally in Orlando, Our Bonnet Creek complex, which was closed for the entire second quarter opened its doors on July onest.
Group demand is virtually nonexistent across to Orlando market, but I'm pleased to report that our property team successfully negotiated a large contract the Waldorf Orlando hotel for media and other ancillary demand tied to the restart of the and be a season.
Effectively buying out the resort through early October accounted for $5 million <unk> incremental revenue.
This demonstrates a tremendous resilience perseverance and creativity of our local sales teams as they try to find ways to identify and capture demand.
As another example of the Hilton New Orleans Riverside.
We look outside of the box for alternative sources of revenue and successfully negotiated block of roughly 690 rooms for Auryxia University of Louisiana to serve as an exemplary student housing for its fall and spring semesters.
Drilling approximately 42% of a hotel, which traditionally relies on a group mix of 65% to 70%.
Our accounting for incremental $7 million in revenue.
We also could continue to look aggressively at each department to improve efficiency.
And to reduce costs as we seek to rightsize the operating model for the future.
More specifically.
We are in the process of complexity operations across several key markets looking to partner with neighboring hotels with similar operators to consolidate management positions, where it makes sense.
We hope to provide further updates on our progress in the coming months ahead.
While there are many factors outside of our control that are having a profound impact on our industry I can assure you that the park team is.
Laser focused on successfully navigating through this crisis working hard to strategically positioned the company for an eventual recovery.
We took the difficult, but necessary steps to drastically cut costs across the portfolio or raising enough capital to more than to adequately cover our liquidity needs in the interim.
On the other side of this health crisis, we believe.
You will find an industry that should benefit from significantly less hotel supply and more profitable hotel operating model as brands and owners work collectively to permanently take cost out of the system.
And strong pent up demand from both business and leisure travelers.
Finally, I'd like to offer my sincere thanks to all of our team members and operating partners. We're truly stepped up throughout this time and have displayed all of our core principles as we always tirelessly through these uncharted waters.
Park as a seasoned and experienced team of men and women and this is not our first crisis and with that I'd like to turn the call over to Sean.
We will provide some more color on our balance sheet and liquidity.
Thanks, Tom turning briefly to our second quarter results, we ended the quarter with a 96% revpar decline, but the majority of our hotels closed during the quarter.
For those hotels that remained open we witnessed slightly better results each month with occupancy averaging 14% in April.
20% in May and increasing to 30% in June.
In July after opening an additional 10 hotels occupancy improved to 36% further highlighting the gradual ramp up and demand.
Top performers in July include our Doubletree Durango hotel at 87% occupancy.
Health and Seattle Airport at 62%.
Cost of Marina in key West average north of 51%.
While our Hilton Santa Barbara Resort also exceeded 51% occupancy.
Looking out over the balance of the year, we expect operating performance remain challenging as continue concern over covert 19 is creating an overhang for both leisure and business travel.
Group revenues are anticipated to be down 95% in the third quarter and we are assuming a similar decline for the fourth quarter as offense continued to be cancelled.
That said more than 20% of this year's group cancellations have already rebook into future years, but another 30% in the pipeline.
Overall, we expect performance will continue to be driven by our suburban and drive through leisure hotels, which currently account for approximately 40% of our room count.
Turning to the balance sheet as Tom noted in his comments one of our key priorities has been to fortify our balance sheet to allow us to effectively manage through this crisis.
Recognizing that its ultimate duration is still unclear.
Due to our actions to balance sheet remains in excellent shape with over $1.6 billion of liquidity available as at the end of the second quarter.
Consisting of $1.3 billion of cash in over $300 million of availability on our $1 billion revolver.
But 42 of our hotels now open we're currently modeling a cash burn of approximately $50 million to $55 million per month.
Which extends to liquidity runway by another five to eight months.
Taking us well into 2023 based on current operating levels.
In May parts successfully issued a total of $659 five year bonds callable after two years with a 7.5% coupon.
Originally targeting a size of $500 million to bond offering was upsized by $50 million, while the market and then further increased that a subsequent tack on offering of $109, which priced above par due to positive market demand.
A portion of the proceeds were used to repay $319 million on the revolver and $69 million of our $70 million term loan maturing in December of next year.
With the rest of the proceeds remaining on our balance sheet.
We were extremely pleased with the execution of our inaugural corporate bond offering.
At a not only allowed us to bolster our liquidity during very uncertain times, but also demonstrated our ability to access alternative sources of capital, which will be a key differentiator for park as we navigate the current operating environment and continue to address our near term maturities.
As a result of the offering and subsequent debt repayment.
Net debt as of the second quarter totaled $4.1 billion.
As you look out over the next 12 months parks financial goals include maintaining significant liquidity to operate under the most severe conditions.
Further minimizing our monthly cash burn through a combination of efficiently reopening hotels and reducing carrying costs.
Addressing parks near term debt maturities in the coming months, which includes $681 million outstanding on our revolver and our $631 million term loan both due December 2021.
And finally, depending on the progress other recovery and state of capital markets.
Beginning the process of deleveraging the balance sheet.
That concludes our prepared remarks, we will now open the line for Q2.
To address each of your questions. We ask that you limit yourself to one question and one follow up.
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Our first question comes from Ari Klein with BMO capital markets. Please go ahead.
Thank you and good afternoon and planning.
And you talked about warehouses.
Thank you can you talk about that even out seasonality in that at maybe impact occupancy post this summer.
Net happy new year demand.
You've seen so far.
Can you repeat your question are you.
Breaking up.
Sorry about that we can can you talk about seasonality and I expect that trend post in summer when perhaps leisure demand slowed down a little bit.
Yes, I think.
Reality of if you think about our portfolio of its VR product types and then obviously our distribution clearly the second half year, we'll continue to be challenged for park.
And the reality as I said in my prepared remarks, youre not going to really see I think a meaningful increase in demand for our portfolio generally for the industry until we have medical solutions in place whether those vaccines.
Andrew our therapeutics and camp.
And confidence is really restored.
We are encouraged as I said I think there's a model with the global raised underway I think there are five or six.
Different solutions better in the.
Phase three trials and so as we sort of think about third quarter to answer your question directly we're probably looking to be down again, probably north of 80% in revpar in.
Clearly seeking up.
The fourth quarter slightly better than that but.
Second half of 2020 will certainly to be a challenge your working today, then given what's happening.
To make a case that.
Leisure demand couldn't get extended into the into the third quarter.
No. There is about 14000 rooms for about 47% of our portfolio.
We are strong driver too. So we do expect as people continue to have cabin fever and want to get out there will certainly benefit from that but but no doubt in the second half year, we'll continue to be challenging still goes medical solutions are employed and confidence is restored.
And then it sounds like you're getting more contract business the air what you've seen from others as well.
How much more opportunity you see the remainder of the year there and can you just talk about rate the rates you're seeing on that.
Yes. This is this is Sean I mean, we are definitely seeing more contract in the next I think this time last year looking at June.
Mix for revenue for context about 5%.
Our around 50%.
So clearly Furthermore contract on this in the base business that we relied upon through the hotels that remain open through office pandemic started and certainly have great relationships would need to crude airline crews in the like debt.
Aided and managed to maintain even pick up in certain markets. So I think thats only be a focus for us going forward on the weekends, we need that layered and we'd like to layered in even during good times.
For some of the size of our hotels, so that will continue and will generally be aggressive engine and looking to get you look at the rate.
Well that generally held up okay on considering but still sell down not 15%.
On a year over year for June.
Hi, Thank you.
Our next question comes from Danny Assad with Bank of America.
Hey, good morning, everybody.
So.
Good morning, Tom. So my question was named Sean just kind of touched on it a little bit at the end there but.
Can you maybe help walk us through kind of how rates held in across the portfolio I'm assuming.
There is a dispersion between your drive to resorts in the rest of the portfolio by Inc. any color you could provide there would be helpful.
Yes, I was doing HDR across portfolio is challenging because the mix shift I think you with the obviously I've talked about contract and with that action that extra.
Contract, we contract typically is anywhere from 25, 30% below what we see in group and overall all these years last business transient so.
Mix shift there contribute to it but you look at some of that drive through resorts remain constant Marina eight in key west a year over year for the month was up 3%.
Reach was our route as David slightly down.
And Santa Barbara is held up.
Okay, I think slightly down.
<unk> percent or sounds I think generally in those markets, we've seen certainly strong performance with with rate.
They're better than expected performance on the occupancy side as well and so that in June and even in July building well until the research has happened I think we're probably looking at the key west assets being north of 90% occupied and and really kind of thought on 50%. So.
That's had an impact, but I think rate rate again, it's more of a mix element, but as you look at certain components, even within those deposits that there's a mix element there too, but you're probably seeing range anywhere down from 20% to 30%.
Got it and then just my follow up on so many appears have given us just kind of.
An indication of how much of the group business on the books Thats being cancelled this kind of getting rebooked into future periods.
Can you maybe give us just some color on that anything that you have in terms of group and business and maybe like the pipeline how thats been behaving.
And that's it for me thanks.
Sure I think is actually if I can sit and with others that we have we see about 21% of room nights Heller canceled in 2020, so far rebooked non into later years, I'd say about half of that and we booked in the 21 and 22.
Thankfully not not a lot in 2020.
So we certainly expect that ultimately come to fruition.
And you pipeline, just 30% of that canceled.
Thanks, Mike cancellations that our sit in the pipeline right now.
Ultimately I think taking a wait and see approach.
Certainly thank you that's going to be a good.
Tailwind for money when the vaccine kind of come through and people are making decisions at that 0.3 booked in Q.
These kind of future years.
Got it.
Thanks, a lot.
Yes.
Next question comes from James Roads with Citi.
Hi, it's.
I wanted to ask you Tom you talked a little bit about in your opening remarks, changing the operating model, which is something a lot of the owners have been.
Focused on in this environment.
How are the brands I guess in terms of making meaningful changes to the way the operating model can work and I guess, specifically one thing thats kind of come up is eliminating housekeeping.
During a guess stay even post pandemic and I'm wondering.
Does that make a pretty significant difference in terms of operating margin and other other kind of big moves potentially on the table that would change.
Your ability to put up better margin, even at a lower revenue environment.
Thats great questions I would tell you that this crisis. So im one of the benefits coming out of whats harvest horrible situation for all of the Susan.
There is.
Probably better collaboration communication, among the brands and owners to really Rightsizing business online kind of put him in.
Really three sort of buckets.
You touched on one obviously no housekeeping for steel bars, I, probably modify that in say limited or no housekeeping.
The reality is that it protects the guest and employees.
I think that mindset is probably going to continue post pandemic.
Probably will end up with some sort of opt in or opt out depending on the market in scenario, but there's no doubt from a customer preference standpoint customers was speaking and the evidence is there. So as a result of that clearly you're going to be savings there and we believe pretty significant.
If you also combined sooner re imagining room service.
Going would probably limited menu.
Probably a delivery own a delivery only or pick up sooner.
Drop in knock you will again are you having little contact.
Certainly the gas, which is again preference for many.
I also think.
More contact less front desk.
Really continuing to see an expansion of digital key.
Equivalent, obviously mobile checking the Marriott and higher than others.
I think you're going to continue to see that I think those three buckets. If you will are huge opportunity in the industry.
Take our portfolio you assume we get.
We're going to 100 basis points are lucky 300 basis points, you're looking at probably 30 million to 90 million a year sort of operational savings when you look at pre coping bar.
I think there's a huge opportunity. There are also think there's the opportunity for complex.
We are in discussions with our operators abound.
There are common managers across ownership groups in certain markets can we combine to book, whether it's a general manager of a management staff.
There are other operating costs that we can combine to really take cost out of it I know Mariano both built are passionate and committed to this and I know there were also working to cost going above the properties well. So we are we're all in all this concept. We think it makes sense is can benefit you'd street.
There will be complexities to every one of these initiatives but.
But really the passion motivations matters, we are encouraged as we move forward.
Okay and then in your opening remarks two huge.
As a less hotel supply going forward were you talking about.
The pet potential for new development or is there your view is that a significant.
Piece of the exist in place inventory will reopen.
I think that it's a fair statements news just given the dire circumstances that we all find themselves in there there will be.
Owners, who are.
Either.
Extended honest the only difference.
Able to meet debt service I think delinquencies are already up 21%.
In the industry. So as you look across markets you have to believe in New York as an example.
Summer talking about perhaps 10 or 20% of supply for market. It already has a 135000 rooms, plus or minus that thats significant as you think about Chicago.
Perhaps even a San Francisco, depending on how long obviously the pandemic, whilst you have to believe that there will be assuming a reduction in supply.
We will be owners that I think probably modeling for refugees, but others that look to convert to other uses.
So we think that will be a.
A tailwind when we get Rubis. We also think as you think about that providing.
Somewhat of an opportunity for more pricing power, which really views for use as we all know is moving back that certainly the latter part of this last cycle.
So we think that's going to be a net positive coming out of it again every market will be a little different but I think there certainly are a number markets, but better fair to say that we'll see reduction in supply we're talking about the us when I'm talking about outside the U.S.
Thank you very much appreciate it.
Thanks.
Next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning, So a question on the.
Good morning question regulatory environment summing the largest markets.
That's what it's W. thing some of the local governments are.
Looking to try to get things open maybe in the fall a Windsor are meeting as a risk that's something you mark since the close but much longer even in the first half of next year.
And then they are conservative but in terms of open.
Yes, it's a great question and I would say the most challenged is probably going to be Hawaii.
If you think about Hawaii.
The administration there I think in fairness has done an excellent job I think they're only about 2600 pieces.
Only had 27, yes.
Fortunately, we have seen us lined up to this week I think 200 cases on Monday Tuesday.
140 cases, plus or minus on on Wednesday, So I know the governor in abundance of caution continues to manage.
The state carefully.
As you know that opening there has been pushed back a few times currently we're planning on determine the first we have an earning contrary it would not surprise us not one work to get pushed back.
I think as it relates to San Francisco.
Merit, Steve kind of Phase Threea begins on August 30.
So we would expect to sort of beginning that we're not planning we've got six hotels there we've opened two.
There is one that we will open this month mothers move away from really more growth.
And more acceleration in demand, where we would open.
Certainly expect perhaps that to be in.
In the September October timeframe, but again as I said in my prepared remarks, we are carefully managing one are designed to open hotels make sure that we can do a safely and profitably for at least lose less money than you currently Ares management cash burn.
On the team has done a great job as you know, bringing the cash burn rate down from what we call. It 5 million down to 65 million as Sean said in his remarks. It really the actual cash burn rate is really 50 to 55 million, giving us really another five months of runway some parts go well north.
Two years of runway mid year, we pick on the most extreme scenario.
Got it thanks, and then maybe switching gear. So this so often several transactions what are you, saying in the market right now and when you consider bringing some massive market in the back half of this year early next.
We are really focused.
Anthony in cities, Sean pointed out there really four priorities from partying clearly reopening hotels I, just mentioned middle thoughtful profitable way, where obviously minimizing our cash burn rate secondly, continuing to reduce that cash burn rate.
Third addressing our near term maturities.
Given the great success, we've had with our Covenant relief and then again our bond offer park has a lot of optionality given our scale.
We continue to fourth would be continue to evaluate noncore asset sales.
Ill remind listeners that we sold 24 assets were 1.2 billion, obviously over the last few years, including 14 assets internationally, we've never stopped in discussions with prospective buyers for our noncore asset sales. We would if you will see us continuing to.
Have those discussions and we congested kobin discount narrowed some you'll see us contract.
And with an objective obviously using those proceeds to reduce leverage.
It is not.
It is our preference as we've done you continuing even post Chesapeake we've sold about 470 million in assets pre coded. So we were really well in on way continuing sell noncore assets.
In the Kobe discounts still about 20% or is that closed any reasonable yeah. I think it's close I think.
Probably 20% 30, depending on the market in the asset Anthony but I think down from probably 30 to 40.
But but it continues to narrow as we.
As we get closer and use more evidence that there will be therapies and vaccines and we believe that.
And we certainly believe that global rights under way has been a yield that that will provide the confidence people know, we're going to get to the other side because of this pandemic.
Thank you.
Thank you.
Next question comes from Bill Crow with Raymond James.
Hey, good morning, Thanks, Tom.
How are the gas reacting to the changes operationally and and from a labor perspective as they go to the especially some of your high end hotels.
Yes, it's a great question, though I think.
Choose my words carefully when I said earlier than I think you'll see sort of limited to no kind of housekeeping pristine overs clearly as you think about luxury.
I think that limit to move will be limited and it will be really on a case by case would not surprised me a lot of as an example that we largely continued housekeeping I think that got US guest is going to demand for Q, we prepared to before that incremental service, whether thats embedded in the range or whether it be supplemental charge.
But I think these preferences are we talking about.
Many of them will.
Certainly in the near term I think the permanent if not longer as we think about Odyssey advances in technology, which are already exists to your contact most front desk using digital key clearly on housekeeping deeper not kind of when people in Rome, we're seeing that and then room service.
Room service again as you get through a much we product you have to find what is the right model for that particular asset I think generally speaking this.
The student delivery only in kind of drop and knock use is really going to continue to take.
Yeah, So we gain momentum and we're not seeing any resistance and also.
All right, but.
Quickly could you just talked about the economics of using the hotel for student housing.
Well.
If you think about New Orleans, as an example, or hotel that runs 65 and 7% group.
Early when there's not a lot of demand and I credit our operating partners.
Or in our asset management team being so pretty active.
So proactive.
And reaching out and in this case the operating models, we will not be room service.
We will not be housekeeping.
Not be food and beverage component.
Really is providing them with with that new product, which is what the university mumps, which is what the students. What we found that balance I don't recall, the actual rate for that business showing me.
Remind them second, but I think it really made sense incremental benefit to us about $7 million incremental revenue really not be cost component.
So the flow through here is going to be really good for us and we are looking for similar opportunities.
In many other markets as we move forward.
Yes I.
I could add to that sounds right I mean to flow through.
On a kind of add back the fact that you're not paying you doing housekeeping and the like you're not taking you're not paying the.
The acquisition cost of that customer Directv and add up you kind of gross debt rate back up I think you kind of gets where you guys didn't contract room again.
You think about this asset and norland as environment over the next nine months.
From Citi.
Take out 40% year rooms for this on a hotel it relies on say present as group and they can certainly the right tried to make in near term.
Thanks for your time.
Thanks book.
Our next question comes from Neil Malkin with capital One Securities. Please go ahead.
Hey, guys.
Hey, guys.
Hey, maybe a higher level question are way to think about it you talked about the vaccine or another therapy.
Something like that being in a pretty late stage trials, which we can I agree it fantastic.
However, it that there's still going to be time, it takes to get commercialize distributed.
Get public buying or inoculation and then it's also about.
Corporate and individual comfort so.
Maybe if you can just talk about or Jason initial thoughts on.
Your your view for what the largest.
Corporate accounts you have.
What their stance is or how you think that will actually play out in terms of seeing demand come back when we do have a vaccine because that.
It's obviously going to be more of a gun to take longer than Oh, we have a vaccine and then tomorrow other groups come back right. There it's a process.
Mentally as well as you know objectives, so any any thoughts would be great.
Yes look.
It's a great question and I think.
I think that make a couple of comments here I think the first is that Mike you want I think all listeners I believe passionately in the American spirit the American will.
Also believes year in this particular mountain we've got a global endemic and then you've got this global race underway. You've also got the federal government investing billions of dollars and as you know there already manufacturing.
Many of these.
Prospective vaccines with the hope that.
Some or all will hit in that they'll have capacity there.
None of us can predict unit.
It is really going to be adoption.
If the medical professionals are coming out and VR communicating that these therapies and our vaccines are safe in their advising that we're going to take you have to believe that the vast majority of Americans will get to the other side of it. So that we can resume our normal lives of go into weren't going to restaurants go into movies.
Travel.
That human interaction that we're all star for that is really not be replaced by I assume and webex in some of the other devices.
Hi, My personal belief is that the adoption rate will be high.
You're right don't take some time I think is Congress.
Yes is the liability issue as you should think about companies in schools.
Governments, there really are three part of that limiting the liability once we get side of it.
We're anxious to resume their lives so.
Is that our first quarter use it.
We have them approved by November I, certainly don't think its December and everybody's back to the to the old normal, but I certainly can believe that by first quarter, assuming the adoption rates going as planned and as recommended you would start to see the beginning of companies, bringing people back travel resuming.
I still believe that leisure will be ahead, and then followed obviously that by business transient and group I think the long long tomo.
Oh content will be group.
Until people really again feel safe incompetent companies are probably going to continue to be careful and cautious.
And we'll have to continue to rightsize in Spain creatively.
Our businesses were due as we were doing in New Orleans, obviously, taking 40% business and since the using it as a as exhilarating for University will do whats necessary minerals, we continued to.
Gain revenue and certainly reduce our cash burn rate.
[noise] Viagra appreciate I understand it that it's up question, but just like you hear your thought.
Sure.
Well, so Greg grab this year.
Yes, so on John.
It seems like the covenants you have than the waivers or the I'm sorry, the restriction.
For the waivers are pretty strict that you saw slight then you talked about selling noncore assets I'm. Just wondering maybe can you just walk us through like what are you not allowed to do what can you maybe the salient.
Point.
That are that you have to adhere to during your.
Waiver period.
Sure you ultimately we do have I think typical restrictions you're going to do you expect to see no buybacks and dividends and the like there currently able to kind of manage our operations refinance on terms of currency that we can and do that for refinancing purposes.
But for the kind of additional debt.
Out of that more and you sell assets.
A repayment waterfall.
And that kind of drive it and ultimate looks to pay down.
So the dead and there's a mix between revolver and and term loan mix between.
Still liquidity on the revolver side with some permanent capital reduction from a debt reduction.
As well, so and our restrictions in terms of while there really wasnt given grant that is relief.
A quick pro pro as to kind of behave in a way to kind of keep.
Pete to cash in the system in a way.
So that's kind of what we'd both mid year two pilots do for us was.
Ending our our credit facility out a year and getting on a percent approval on that as well as in liquidity.
And we were able to accomplish all that so I think we have plenty of room to operate we have.
$20 million general investment bucket.
Utilized we can do asset sales and attend 31 without any restriction there and weekend. We ultimately can if were to raise equity.
We have fiber up about related to use for other purposes, Besides paying down debt at this point. So I think we certainly feel like we had enough optionality and flexibility given the circumstances.
You know I appreciate that and then one quick housekeeping I guess on the same line.
The said you guys deferred principal and interest.
Some of your mortgages, hey, how much is that saving every month and then b is that in in your new cash burn rate.
That is not when we ultimately deal with our cash burn rate you Boston direct theoretical as it as we assumed all assets or close to kind of what we're seeing currently with with the majority assets open more kind of an accrual base. We're not we don't want to get into the mode. At the we'll try to get that working capital.
So we're still counting those kind of that kind of interest carry.
Our cash burn.
But ultimately it's I think you've gotten concessions on thus far kind of a lot in the testing portfolio and so it doesn't amount to a lot, but it's about $4 million to $5 million deferral across kind of three six month period.
All right. Thank thank you guys.
Yep.
Next question comes to Gregory Miller with Truest Securities. Please go ahead.
Good morning, Tommy Sean Hey.
My first question. It's my understanding there is pending us legislation that may shield businesses from liability as people get sick from Kobe 19.
I believe this letter.
We signed or is supported by AJ Asian outlay amongst other groups I am curious how do you see corporate travel demand progressing if this bill as past.
Well.
The majority leader, Greg So I'm, just wondering because part of the multi decisions I think made it had been we cleared the.
Pending legislation. This next phase, we're not happy without having.
Some sort of liability limitation across businesses schools governments et cetera.
I think it's an important cornerstone.
I think what's what's more important used to get this overall bill passed.
The additional support that's needed for small business the unemployment insurance and then again continue to support all of the positive work that's happening on the medical fine.
I think all of that combined I think provide the confidence to really accelerate the pace. There's no doubt the company. This weiner, our being careful im cautious no different than what we are all doing.
We've got a skeleton crew here in our office.
Since the everybody's working remotely people are making it work I think we're all anxious to get to the other side as quickly as we can but I think it takes all of those components, which I think we're really accelerate.
Clearly the vaccine Andrew therapies being apparel mile that's going to provide really the confidence that's going to give all of us the ability to come out of the bunkering begin to resume our lives again.
Great. Thanks very much.
One other question that I have.
I appreciate all the great disclosure in the supplemental deck with the reopening dates that you provided.
And given the labor cost and operational challenges with the cleaning ordinance that was passed in San Francisco.
And I read your editorial and the San Francisco Examiner I'm curious, how the cleaning cluster, thence combined with with operational costs and your modeling today, how that factors into your plan to reopen dates within the market.
Yes. So it's a great question, we have we had park we're actively involved in.
I think pointing out.
To the city of San Francisco, along with Americans on Logic Association, another owners and other peers that.
This was really bad legislation, we have a we've got so you've stated by the association, we obviously have.
Clean study by Hilton committed to clean by Marion equivalent across all the brands.
Great men and women on the operating side and know how to clean hotel unsecured seek so we really thought candidly. This bill was it's nothing more than a jobs bill.
It's not a safety bill.
I am confident Greg if you entered today.
When we get the vaccine would be get protocols in place for people.
Feel safer the reality is that we're in a global endemic.
These local officials, including the unions are desperate.
They're panic, they're trying to just protect jobs.
I don't like to tactics, but we understand the issue and I think what's most important.
That we prepare to reopen we have the appropriate protocols in place to keep our our employees in our guests see booked at Indiana today, we don't have mutually assured destruction and.
No we're seeking positively about the interim and long term about our group business I'm confident.
A clear heads will prevail and we'll get to a balance that that really matters and that continues to uplift this business.
And at the same time, taking cost out of it guests are speaking guest are clear about what they want.
One more flexibility on the housekeeping opt in or opt out.
There's no doubt that they want to bypass the front.
You're not going to be able to stop these advances in technology.
The industry has got to work together with labor.
Certain markets across the industry to find the right balance.
We don't take these things personally.
We are confident they will find the right balance and we will reopen our hotels in San Francisco among other cities.
And these are the grade cities of the world people want to visit in travel to and our employees continue providing great service that they've always provide.
Thanks for the great insights and therefore to being on the road hopefully soon at their hotels as well.
Yes.
So.
Question comes from Stephen Grambling quick Goldman Sachs.
Good morning, they state your question.
Hey, how are you.
So on that as we think about financial leverage longer term and also just hearing a number of your peers have been real reprioritizing and reinvestment into the base business for the base hotels. How are you thinking about a re ramp in capex as things normalize within that capital allocation priority and is there any kind of catch up that may.
Need to happen.
Properties reopened.
Yeah, we've always taken the decision on Capex of about 6% certainly given our portfolio in size and scale.
So we obviously you can expect given where we are in endemic we may be.
Appropriate decision to really reduce capex by 75% as we begin to ramp up.
We clearly will be a little bit a catch up will soon that will probably ramp up whether that's an incremental 100 or.
Or 200 basis points, when we take that.
Seven or 8% temporarily.
We will do whats necessary, we continue to higher life safety emergency capital, we continue to monitor.
Carefully we've got a very capable design and construction team.
We continue to monitor our assets.
Make sure that things are in good order.
Over the intermediate and long term.
We believe there are a number of embedded ROI opportunities within our portfolio. Obviously Bonnet Creek is you know we've started the expansion mere meeting space. We've obviously deferred that for now and in the rebranding of that asset clearly, we'll continue to look at our asset in San Jose converting them from doubles region.
We obviously you got to double tree in Crystal City, which is at the front door.
Facility there.
Second headquarters so we've got a lot of Optionality and lot of great upside in this portfolio that we look look forward to really getting at is reported in future.
Thanks, and as a follow up to some of your comments earlier I just given the structural changes that you do anticipate in the business model in some cases, how many of these changes influence what might be deemed core versus non core assets.
Yes, that's a great question I would.
Lets say one of the things that I think its importance to not.
To not overreact, I think first and foremost some parts side, we are confident in our strategy again upper upscale and luxury hotels in top 25 markets in premiums were destinations.
We have conviction over that I think about our assets in Hawaii Hilton Hawaiian village 22 acres 2900 rooms.
World Class a fortress five towers, you could never replicate that in today's world think about the assets that we haven't CBD in June in San Francisco.
New York show to enter the Chicago Hilton.
These are well located pulls on real estate.
Having said that and we also believe that you want to follow the demand.
It was markets, having huge barriers to entry demand will come back.
Clearly there will be other markets and as we think about shifting growth.
You have to believe that Austin Nashville, other markets like that.
She knew to grow and expand clearly we'll look at.
Spanning our footprint into those.
We probably don't mind in one market to be more than 10% to 12% in a perfect growth clearly Hawaii accounts for more of that today.
Part of the benefit of being Chesapeake is that we were able to bolt on.
16 assets that really gave us brand operator in geographic diversification as well so you're clearly look for us to do more than in the future as we get to the other side of this pandemic.
There's no banded we're not we're not retreating now and looking to go purely all suburban because the suburban seems to make the most sense. Today you now see that I would use is think about several years ago when everybody thought independent hotels in New York rigor, we can right thing to do everybody rushed to by independent hotel.
So I.
I don't think that strategy worked out so well for many people.
You won't see you won't see a panic Kevin.
Our team you believe owner with conviction our current strategy will pivot, we'll adjust I will recycle noncore assets and then we'll continue to look at those other pockets of areas, where there are growth opportunities.
Makes sense. Thanks, so much.
Yes.
Next question comes some brand spot tour with JP Morgan.
Hey, good morning, everyone. Thanks for taking my question.
So just curious if you if you mind sharing.
July sort of Revpar metrics, just given all the moving pieces you want to.
Bridge, the Twoq you with the sort of Threeq guidance push you gave.
[noise] first July.
Hi, Revpar.
What has been down.
Slide Revpar is up from a flash standpoint here.
Yes, John 88%, but if you look sequentially June occupancy was up about.
It was about 9.4% we grew July occupancy to 14.7%.
But but July was down 88%.
Right. Okay. Thanks, and then just looking out to the second happened and I don't want to split hairs just curious.
What is driving the confidence at that for two would be better than the three too in terms of revpar.
Well I want one we would think obviously by the end of September we said we.
We expect that 80% of our hotels open so clearly having getting closer to north of 80%, whether that's 90 or 100% by by fourth quarter, having more hotels open certainly gives us the opportunity whether it's through contract business models that we ancillary revenue. When we were again, we're beginning to see a slight.
More confidence and get on the medical side, where we would begin to pick up no doubt second half is going to be challenged I don't want don't want to win imply I think as you know were down the 96% here in the second quarter, we would probably expect to be down north of 80% in revpar in the.
Third quarter, and then clearly in the fourth quarter that should certainly moderate weather, that's down 60% to 70% somewhere in that range, but again that would only be.
Really hard guess at this point.
Okay, Great and then but.
Aside from that in the fourth quarter versus third quarter, There's no seasonal difference I mean medical solutions side, if that doesn't happen for us.
Seasonality would dictate necessarily any any lift fourth quarter over third quarter.
No no. There's no look you could make the case that perhaps leisure gets extended a little bit.
But it's a difficult environment people, you see more and more evidence of the people resisting the cabin fever, and beginning to get out whether that's drive to with it spending time.
Even though sales meetings consultant. So you are seeing some evidenced it's on the margin.
People are beginning to.
To begin to travel certainly a little more but but at the end of days I said in our prepared remarks, I think it really comes down the medical solutions will be the game changing.
Fair enough. Good luck. Thanks. Thanks.
Next question comes from Chris Woronka with Deutsche Bank.
Hey, good morning, guys.
Yes.
Hey Board and Tom.
Question for Tom how much you do you worry at all about rate integrity or how do you look at rave integrity going forward with you know the industry looks a lot different than it did 11 12 years ago. We've had M&A, we've had a lot more pushed towards direct bookings, but you know if there's some piece of group.
Corporate that's missing for.
A couple of years, how do you how do you look it at things like renegotiations get also understanding that there could be positive offsets on the on the supply side right. How do you see the rate situation shaken out for the next couple of years I know I know, that's a crystal ball type question.
Yeah, It's a great question, Chris one that if you think about the last cycle I think the frustration that all of US would have rights. We never we never really saw the pricing power for all the points you made and I think supply contributed to it I think clearly we.
The Utica buoy played a.
Part of that and the other part is that the business. So fragmented I think the opportunity here as we think about Rightsizing I think there's the opportunity again, but supply you'd have to believe is going to be contraction. We can argue how much but clearly this to stress is going to create a distraction.
A reduction supply for some period of time I also think when we come out of it if we're able to rightsize the operating model.
Gives us the opportunities well think about customer acquisition cost and can you continue thinking about ways to.
To provide different level of value in service and can we go to like the airlines have gone more Alec Harlem some.
The airlines retrained us in their process I don't know why hotels can also do the same use or the types of things and I know, we're talking to the brands about.
Operating partners and I know that owners are doing as well we should use this crisis, it's painful as it is to get on the other side much better product.
Much leaner operating model and hopefully more viable business for all of US for there is theres better communication collaboration to these topics and I've seen in mind.
30 years in this industry.
Great very helpful. Tom then just a follow up on.
On the on the capital allocation decisions I I.
Is there is there a key indicator you look for if if equity is going to be a part of the equation is is it you can't get asset sales, Don which I think would be unlikely, but or is it more opportunistic as there are certain number just trying to get a sense as to we rubber that there was a ton of equity issued coming out of that last downturn to shore up balance.
Balance sheets that ended up being a very good liquidity event for the for the industry.
Yes.
Fair question, Chris I would say the reality to some.
And if you think back in a period of time, which I remember I have also happen to be on a few other public company boards and I think a number of companies that made that capitulation trade. It so because they had to whether we're showing up their balance sheet or alternatively, if perhaps at a use of proceeds I think as it relates to park and where we are we will.
We are laser focused on continuing to manage our liquidity is based on the great moves at the team has made a lot of credit for Sean into the team clearly our very successful bond offer.
We have obviously enough liquidity to the next two two and a half years, there's no need for us to do any kind of equity offering at this point.
As we get beyond hopefully, we'd get the vaccine we get more clarity, we see an acceleration in demand.
We would think about equity offerings that are much later date as a potential.
Growth vehicle not because we think there's there's a need for any kind of equity offering in the near term.
Equity would be the last thing we want to do at this point, given where we are generally where we trade you trade.
At significant discounts energy a significant discount to replacement cost. It makes no sense at all for US do any kind of equity offering and certainly something that would be so dilutive to our current shareholders. So we would be adamantly opposed to that.
Okay very helpful. Thanks, Tom.
Next question comes to Robin Farley with you, but yes.
Great. Thanks, My question I forgot to assist how are you.
My question since the start of the call, but it's going to sound like a follow up to a two under previous questions. Because you touched on it a little bit, but I wonder if you could give just a little more color on what your usual mix of business and leisure transient is in Q4 versus Q3, just how that transitions between quarters than in a typical here. Thanks.
But say contract was always and always Ben I'm kind of about 5% or so on a on a revenue mix basis has been kind of looked at Q3 versus Q4 and Ah.
And.
Could you just can't give me one second here, but you look Q3 Q4.
Yeah, I think it's generally Ben it's generally held about the same I'm looking at it and right now it pretty much from a revenue standpoint last year I'm pretty much spot on the same or from a revenue standpoint. So.
From a group was kind of high it was almost 25% or so tranche that 64% contract about 5%.
Okay I meant the I'm sorry, the split between leisure transient business trends in if you go from Q3 into Q4.
Oh I don't.
I don't have that front any.
Hey, just thinking about.
Obviously that Tim.
Sure It seems where that's where the demand to focus in Q3, and just kind of how that would typically looking going into Q4.
The degree to actually become maybe more dependent on.
On the business transient kind of things.
Yeah, I think historically, Robyn, it's probably on the margin.
Few percentage points, but but Sean and team will look at it will get back to to make sure you back where we answered your question.
One thing, it's going to be that significant.
Thank you very much that's a that's it all my other question since I've been asked.
Next question comes from Lukas Hartwich with Green Street. Please go ahead.
Thank you good morning.
Good morning Lucas.
Good morning.
I'm curious do you think this experience permanently increases the risk premium for big box itself.
You know look it's probably easy to make that statement today.
Given given what we've all been through I mean, I would I would say if you think about generations.
The real real benefit I think of having obviously views.
These big group.
Gels anchored the way you do is the multiple sources of demand right you got leisure business transient.
You got embedded group in House group, you have the ability to really take advantage of Citywides and.
You have all of those wonderful events that occur.
Certainly religious family et cetera, weddings, so I would say the diversity of sources of revenue I would also say the fact that there the huge barriers to entry to being able to replicate think of how few big box hotels are getting constructed be near impossible to too.
Really replicate the portfolio that we have across many of the major cities in the U.S. So.
Clearly, we take it on the Chin right now given given one our product type and given our distribution, but I would also say that when we get to the other side of this whether that's three months six months or nine months park is going to be incredibly well positioned with an improved business operating model I think tremendous pent up demand.
And I think the opportunity for us to have outsized outsize years of growth.
It's not happening right now given the reality, what we're faced with but we are encouraged im confident that we will get to the other side.
That's really helpful color. Thank you and the my other questions for Sean.
I'm just curious about the prospects for.
Extending the revolver on though a term loan that are due late next year.
Yes, very confident we do kind of coming off the bottom amendment. We did in may look to reengage and work through that with the banks have already having conversations with them.
Yes.
And again, Tom that's the Optionality, we haven't yet we're looking certainly did you realize that as we explore options, but that certainly expecting.
Further reports on that.
After the second third quarter.
Perfect. Thank you.
I would like to kinda floor over the top Baltimore for closing comments.
I appreciate all of your taking time today look forward to having our third quarter call and.
In late October stay safe you well.
Look forward to talking with you all soon and can't wait to the days that we can be together and in person meeting.
This concludes today's conference. Thank you for your participation.