Q2 2020 Host Hotels & Resorts Inc Earnings Call
[music].
Greetings and welcome to the host hotels and resorts second quarter 2020 earnings webcast. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
Richard require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now just turn the conference over to your host Mr. <unk>, Vice President of Investor Relations for host hotels and resorts. Please go ahead.
Thank you and good morning, everyone.
Well we begin please note the many become much make the I consider to be forward looking statements under federal Securities laws I, just coaching <unk> filings with the FCC. These statements are subject you must risks and uncertainties, but could cause future results to differ from those expressed maybe a notional guess it publicly update or revise fits well with it.
In addition, the on today's call, we will discuss non-GAAP financial information such as Sue.
The EBITDA Ari Cashman 'cause your children.
You can find this information together with reconciliations most directly comparable GAAP information.
Turning skus release in our 8-K filed with the FCC.
Not too far enough first nation I don't know whats nice is hits Michelle.
Participating in today's call with me he will be <unk>, President and Chief Executive Officer, Brian Mcmoran Principal fund <unk>, some controller and sort of coach executive Vice President strategy analytics.
Now, let's turn the corner that's true.
Thank you Pedro and thanks, everyone for joining us this morning.
We hope that you are staying safe and healthy during these extraordinary times.
The lodging industry experienced a challenging second quarter, which record revpar declines in April.
Hi, slight improvement in lodging demand remained Jim.
Even with our operators, we responded swiftly to the changing demand landscape I, reducing our second quarter hotel operating expenses by 72% year over year.
As stated in markets began to either lock down our portfolio would treat over 100% hotel revenue growth from the lows of $24 million in April $249 million in June.
For the ended the second quarter, we successfully amended our credit agreement and achieved outstanding terms that preserve our liquidity and retain our flexibility to capitalize on value enhancing investment opportunities.
Oh, no we emerge from the most challenging quarter on record for home and the travel industry were significantly lower operating costs greater balance sheet flexibility and access to two and a half billion dollars liquidity.
Starting with operations, our second quarter expense reductions and revenue growth were driven by exceptionally agile asset management and the Swift reaction of our world class operators.
As lodging demand planning to record lows in April we worked with our operators to suspend operations at 35 hotels reduce hotel fixed cost by approximately 50% and reduced over all hotel operating cost by 72% year over year.
Hi savings were primarily driven by steep reductions and wage and benefit expenses and the fixed portion of a bug property allocated cost as well as by suspending most brand standards and contributions to hotels at that any reserve accounts.
And operational hotels, our managers significantly scale that operations by closing gas from floors and meeting spaces.
When leisure demand began improving through May and June we swiftly pivoted to reopen hotels and work with our operators to drive 380 basis points <unk> average occupancy gains and a 50% increase in average room rates across the portfolio from April to June.
As of yesterday, 64 up or 80, consolidate hotels, representing 78% of our total room count we're operational.
We prioritize reopening eight suspended hotels located in drive to leisure markets, including Florida, San Diego, Phoenix, San Antonio and Orange County, as these markets captured leisure demand and delivered higher second quarter. Revpar, then the rest of our portfolio.
We currently expect another six hotels to reopen in August with operational rooms, representing nearly 90% of our total room count by month then.
As a reminder, we work with our operators to reopen a property when it's expected to sustain approximately 10% to 15% occupancy levels.
At those levels, we expect incremental revenues to exceed the incremental cost I being operational resulting in marginally lower EBITDA losses.
Our preference is for hotels to remain operational rather then suspended because it operational property is capable of capturing spontaneous short term demand and better position to attract future demand when the market begins to recover.
All that said, we continually review our hotel occupancy trends and won't hesitate to suspend hotels operations and the marginal benefit of remaining operational turns negative.
For instance, we are currently reviewing the New York in San Francisco Markets, New York has been slow to reopen with the recent pause on indoor dining and the cancellation of the 2020, United Nations General Assembly, and New York Marathon event, well San Francisco has enacted in onerous costly and unnecessary.
Operating ordinance.
As we deliver both significant expense reductions and gradual revenue improvement, we reduced our hotel level operating loss by nearly 50% from $73 million at April $37 million in June.
Our hotel level monthly operating loss average $54 million well above property corporate level monthly cash flows averaged $79 million and the second quarter with a ladder, reflecting a concentration of capex, which is expected to decreased by approximately $100 million and the second half.
The year.
We ended the second quarter with two and a half billion dollars available liquidity, which includes $750 million have available capacity under the revolver portion of the credit facility as well as over $150 million odd FF any escrow reserves.
Assuming operational performance remains at second quarter levels, we would expect approximately 100 $110 million up total monthly cash outflows, reflecting an average hotel level loss of approximately $50 million a month as well as estimated capital expenditures.
Interest payments and general corporate overhead.
And this scenario, we would expect the end 2020 with approximately $1.8 billion to $1.9 billion total available liquidity.
If operational performance remains at second quarter 2020 levels beyond yearend, we would have ample liquidity until mid 2022, even with Capex near 2020 levels subject to continue covenant waivers for our credit agreement.
Moving onto our balance sheet, our quarter end leverage ratio as defined in our credit facility was at 4.6 times. Our interest coverage ratio was at 4.4 times and our fixed charge coverage ratio was at 2.7 times all of which were within the limits specified in our prior.
Credit facility covenants.
With the amended credit agreement in place our quarterly tested financial covenants were waived beginning July 1st 2020 through the second quarter of 2021, we're testing to resume for the third quarter of 2021.
Although the duration of this pandemic induce crisis remains unknown, we continue to expect our liquidity position and balance sheet capacity to remain key comparative strengths that differentiate host. It's one of the few lodging Reits that is less likely to need to issue equity expressly to de lever its power.
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Shifting to business performance, we saw clear signs of a recovery in consumer demand through May and June I state and market Lockdowns began to east.
Our booking pace and indicated a solid pick up in June and that trend leading into the third quarter, but it has since decelerated since daily infection rates in certain markets have sprite.
13 of our top 20 markets have regress, they're open reopening phases in the last three to four weeks, while the other seven remain in their existing phase.
Needless to say this trend has impacted our reopening fabs.
Well in Hawaii announced an August 1st they would lift the 14 day quarantine requirement for travelers, who test negative for covert 19 up to 72 hours prior to a rival the on the books occupancy for our Mowery resorts quickly reached mid teens.
We therefore expect it to reopen the end as Maui and the Fairmont Kea Lani in August.
But have now the radar reopening France as Hawaii has extended the quarantine through at least the end of August.
Surprisingly, we saw some group business in the second quarter, despite the absence of a vaccine or an effective therapeutic.
Excluding New York, which benefit from Cowen 19 related Emergency service services group business traditional group business showed signs of improvement as it grew from 1700 room nights sold in April to 12855 sold in June.
For the whole portfolio business transient room nights grew 150% to 12450 room nights in June after bottoming at 4800 50 room nights in April.
Our business transient demand has primarily been driven by defense contractors, we have begun to see consulting related business travel in July.
Government transient room nights also improved from 650 room nights in April two 6450 room nights in June.
Finally contract business held up relatively well in the second quarter with 43000 contract room nights sold in the quarter, our San Antonio hotels increased airline crew volume year over year, while Newark Airport Hyatt place Waikiki and Grand Hyatt Buckhead, all salt production improved throughout the <unk>.
Border.
As of June our properties had 1.8 million group rooms on the books for the full year 2020 down nearly 62% from 4.6 million group rooms same time last year.
Our total group revenue pace is down 81% and the third quarter and 49% in the fourth quarter and we continue to expect group cancellations in the second half of the year.
We have rebooked approximately $120 million of cancer <unk> total group revenues with an additional $96 million and the pipeline that collectively represent nearly 21% of the total group revenue they cancel this year.
We're also working with our operators to find creative ways to fill the demand gap with long term group blocks from schools sports associations and corporates.
For example, you send airport Marriott received a large corporate group booking up 175 rooms per night from July to December. In addition to another Harper group booking I've 100 rooms per night on a month to month basis.
The rooms are being used to quarantined coven 19 negative employees for 14 days prior to international deployment.
Looking at next year, we are experiencing a high single digit deceleration in our total group revenue booking pace for 2021.
As measured by definite revenues on the books.
Most of the other deficit concentrated and the first half of next year and minimal impact to the second half.
Our tentative revenues. However are tracking nearly 30% ahead of the same time last year, reflecting robust pent up demand that's waiting for the current health and safety risk to subside.
Our business outlook depends upon how quickly we as a nation can flatten the rate of new Kobin 19 infections, why we await a more effective solution, which we expect will take the form of a vaccine.
In the interim increasing consumers' confidence in our industry has never been more important.
The major hotel brands had been proactive and creating implementing and communicating NEWP cleanliness and health and safety standards, including corporate requirements for face coverings to be warm with indoor within indoor public spaces.
These safety protocols help address the risk of contagion and established trust with consumers specifically at Mary.
Long known for consistency and reliability.
We expect their commitment to clean program to resonate with both business and leisure customers alike.
[noise] encouragingly as a percentage of second quarter revenues, our direct sales through Marriott Dotcom increased 400 basis points over last year compared with sales through OTI A's, increasing by 200 basis points.
As we have consistently said hosts benefits from our strong affiliation with World Class Hotel brands. We continue to believe that beyond strong loyalty programs brand trust and reliability will be differentiators that will help post outperformed during the recovery.
We remain deeply committed to redefining our operating model with the immediate goal of achieving breakeven as soon as possible and the longer term goal of generating higher profitability at lower levels of occupancy.
In the 2009 recession, several operating expense line items were significantly reduced and continue to improve through the cycle.
Downturns compel owners and operators to reevaluate brand standards programs at above property expenses.
An exercise that can result in long term savings and a healthier hotel operating model that better serves customers changing needs.
To that and we're working with our operators to deliver permanent cost savings at the hotel level through the following three key initiatives.
First to achieve a long term reduction in the fixed component of above property charges.
Second to adopt productivity enhancing technology, such as they use a mobile key.
And third to drive efficiencies through the cross utilization management functions.
While achieving these long term permanent cost savings is conditional upon reaching an agreement with our operators we have analyzed the potential benefit they could have on our operating model.
Based on 2019 revenues. We believe these measures have the potential to reduce annual hotel level expenses for our current current portfolio by an aggregated 102 $150 million, which represents approximately 3% to 4% a pro forma 2000.
Maintain hotel level expenses.
Turning to our supply outlook, although there has been little evidence of a material decline and supply. So far there is a historical pattern of supply rationalization after large demand shocks.
When we look at the historic while supply trajectory for the top 60 to 70 markets rooms under construction and major markets fell by 68% two years. After the peak of 2008 and were down 77% by mid 2011.
We therefore expect supply will be mitigated over the long term with rooms under construction declining over time and likely bottoming at even lower levels than in the last recession, given the significantly greater degree of distress.
In addition, we expect record levels of permanent hotel closures due to the unprecedented level of distress in the market.
Turning to trap the lodging delinquency rate has risen from 2.7% in April to 19% in May and has reached approximately 24% in June.
Our analysis indicates a nearly 30% of upper tier hotels, and our top 20 markets are temporarily closed.
Seven hotels.
And our top 20 markets are reported to have permanently closed already and we expect more of the temporary closure is to become permanent.
To conclude we have experienced four months of significant economic uncertainty as our nation Lockdown began to reopen flattened infection rates in certain markets experienced shop sharp increases in others.
Although we expect economic uncertainty to prevail until the health and safety risks posed by the pandemic are fully addressed we are encouraged by the following.
First our operator's ability to adapt the operating room are vital to record low levels of demand by reducing our hotel level operating cost by 72%. Our goal is to make a portion of these cost reductions permitted and to achieve higher levels of profitability at lower levels of occupancy.
Second is the resilience of lodging demand, which began to return as states end markets reopened and as our booking trends indicated would have been greater had infection rates continue to flatten rather than rise.
Although there is some debate about the future of business travel as professionals girl custom to virtual meetings. We would note. The U.S. occupancy has achieved higher peaks. Following the last three downturns, including 911, when many believe air travel would be permanently impacted.
Well speculating on long term behavioral trends and the mix of the biggest global health and safety crisis in a century is likely to be unproductive.
Business transient and group business customers have a proven track record of choosing the effectiveness of in personal interactions. Despite the efficiency of video conferencing technology.
Finally.
We are confident and the strategic advantages provided by our financial capacity to withstand prolong business disruption.
Hostess differentiated and its potential to not only survive. This crisis, but also to capitalize on future long term value creation opportunities that meet our strategic objectives.
We're excited to have entered a new cycle with the highest quality portfolio of iconic in every place for hotels in the company's history and likely in the lodging industry when demand recovers.
We believe that the quality of our assets many of which will be newly renovated will be a true differentiator.
To help us gain Revpar index share at outperformed the industry.
We continue to believe in their strength of both geographic and demand diversity through this cycle geographic diversity will serve us through an uneven recovery as various states end markets recover differently, while demand diversity will help us drive optical revenue management and pricing through the cycle.
My remark remarks would not be complete if I didn't mention how conversations about confronting systemic racism have reverberated throughout our society.
Diversity equality and inclusion remain at the forefront of our priorities and integral to our corporate values.
I was proud to recently joined the CEO action for diversity and inclusion initiative and as an organization host remains committed to fostering these values in our company and our communities.
With that I will turn the call over to Brian.
Thank you Jim good morning, everyone.
Building on Jim's comments the volatility in the second quarter was unprecedented as the demand landscape changed over the course of the quarter.
Although second quarter Revpar declined by 93% year over year. He grew 133% from the depth of the crisis in April through the end of June when 10 of our hotels exceeded or were close to achieving breakeven EBITDA.
For the quarter, we delivered a revpar of over $14 driven by average occupancy of 8.8% in an average room rate of approximately $162.
Total revpar of approximately $23 benefited from $14 million of mostly cobot related group cancellation and attrition revenues recognized in the second quarter compared to $10 million of similar revenues recognized in the first quarter.
In the second half of this year, we do not expect to recognize any further cancellation and attrition revenues related to the pandemic as we continue to prioritize the rebooking of group business.
Our second quarter results include a 45 million dollar payment for health care benefits and special pay for the nearly 80% of hotel level employees that have been furloughed.
We have accrued 35 mean for that expense in the first quarter.
In the second quarter, we accrued an additional 32 million for similar payments that will be made in the third quarter.
The decrease in the third quarter, primarily reflects the reopening of several suspended properties since April.
As Jim mentioned, we work closely with our operators to reduce expenses and have realized a 72% decrease in second quarter hotel level operating costs.
Our wage and benefit expense during the quarter was approximately 81% lower excluding onetime wage and benefit related special costs.
Our variable costs decreased 93% due to lower occupancy, while our fixed costs, including fixed wage and benefits expenses were approximately 50% lower.
The decrease in fixed cost was driven by wage and benefits above property cost relief utility expense in property specific sales and marketing reductions that partially offset other fixed costs, such as property taxes and insurance.
Although long term cost associated with revise cleanliness protocols are yet to be fully determined we believe the cost increase will be more than offset by productivity improvements.
Our operators provided significant cost relief for above property shared service and allocated costs, which are normally considered fixed.
These costs include sales offices rent revenue management advertising the program services funded Marianne centralized human resources accounting payroll as well as I T systems and support.
These fixed cost saw unprecedented reckon redone reductions with some allocated cost reduced by as much as two thirds.
Overall, we reduced operating expenses by approximately 72% year over year, and our low occupancy hotels and by approximately 75% and hotels with suspended operations.
For the third quarter, we believe we will see continued cost containment for wages benefits and variable expenses.
We're cost reductions mirror reductions in overall volume.
With regards to fixed costs, while the brands have not communicate it above property service cost target as yet.
We expect utility and property specific sales and marketing cost reductions to continue.
Moreover, we would also expect the tax benefit we experienced in the second quarter two continue along the same trajectory.
Moving to revenues.
Portfolio wide average occupancy declined by approximately 73 percentage points year over year to 8.8% and our average daily room rate was down 35%, but still nearly $162.
We have generally found that our operators are able to preserve and in some cases to even exceed rates versus the same time last year at properties that are in high demand on strong compression dates such as national holidays.
For example.
Our Florida hotels delivered remarkable HDR growth of approximately 12% year over year with 80 are for the month of June approximately $97 higher.
Thus far this downturn has distinguished itself by the fact that average rates decline are not driving occupancy to the extent that they normally would.
Customers are more sensitive to cleanliness and sanitation standards then to room rates.
We are hopeful that rate degradation will be less severe than in prior downturns and that branded hotels will benefit from having stringent cleanliness standards that should help gain customer trust and strong loyalty programs that should help drive demand.
Shifting to market performance.
Hotels in our drive to leisure markets, which includes Phoenix, San Antonio San Diego, Florida goal, Miami, and Jacksonville, We're running a 1.8% occupancy at the beginning of the quarter and had progressed to 17.4% by the <unk>.
Last week of gene.
Although the portfolio was a negative territory in the second quarter markets with relatively better performance include Jacksonville, Florida Gulf Coast, New York, Houston, Los Angeles, Miami and Atlanta.
The Florida markets, excluding Orlando benefited from leisure demand.
The Ritz Carlton Amelia Island outperformed STR upper tier Revpar in Jacksonville.
By 600 basis points, while our Miami hotels outperformed their STR peers by 250 basis points of Revpar.
Our hotels in New York, and L.A. benefited from medical related business as well as the closure of hotels within those markets.
It is estimated that's 50% of New York Hotel inventory is in suspended operations and that 20% of closed hotels in Manhattan may not reopened.
In Atlanta, our hotels in the market benefited from short term transient demand as well as crew contract business.
Our worst performing markets into second quarter were Orlando, Boston, Maui, Wahoo, New Orleans, Seattle, San Diego and San Francisco, largely due to suspended operations at several of our hotels in those markets through much of the second quarter.
Turning to Capex.
At the outset of the pandemic, we reduced our expected 2020 capital expenditures by approximately $100 million and through the second quarter. We have completed almost 60% of the total capex spend we have planned for the year.
We received $8 million of operating profit guarantees for the Marriott transformational capital program year to date and expect to receive another $12 million over the second half of the year.
As Jim mentioned, we successfully amended our revolving credit facility and term loans at the end of June.
India Amendment, we accomplish three key objectives.
First we bought our portfolio time to make inroads into the recovery.
We suspended the testing of financial covenants through the second quarter of 2021 and gained additional flexibility to accommodate our portfolios recovery for three quarters. Following the covenant relief period.
Second.
We preserved our ability to capitalize on opportunistic value enhancing investments during this period of extreme dislocation.
Under the waiver.
We have the ability to acquire one and a half billion dollars of assets using our existing liquidity, while maintaining certain minimum liquidity requirements.
We have the ability to issue equity without any requirement to repay debt.
We have preserve the flexibility to use $750 million of net proceeds from asset sales for reinvestment purposes.
And lastly, we preserved the flexibility to spend up to $500 million and ROI capex during the covenant waiver period.
This provides us the ability to continue value enhancing repositioning and development projects within the portfolio without experiencing revenue disruption.
As well as to continue the Marriott transformational capital program, which benefits from operating profit guarantees.
On behalf of the host management team I would like to thank the members of our bank group for their continued support.
Looking forward for the rest of the year.
We're not providing 2020 guidance at this time due to the continued lack of visibility.
On the depth and duration of this crisis.
The timing of the reopening of individual states and localities and the expected operating restrictions for businesses as well as individual company travel restrictions.
Once again, we wouldn't noted in prior recessions peak to trough declines in hotel level EBITDA had been roughly twice as large as the peak to trough declines in revpar.
Although this two to one ratio should have deteriorated considerably in a near zero revenue environment. We believe it will continue to hold true for our portfolio due to the significant success in reducing fixed costs at the property level.
Today more than ever we believe that host hotels and resorts is the premier lodging read in the industry.
We have a high quality well diversified portfolio, whose consistent performance is driven by strong in house analytics and by working with the best operators in the business.
With the only investment grade balance sheet, among lodging reads no significant debt maturities until 2023.
And approximately $2.5 billion of available liquidity as of June Thirtyth.
We are well positioned to deal with this crisis into continue to execute our strategic vision to create long term value for our shareholders.
Thank you and with that we will now be happy to take questions to ensure we have time to address questions from as many of you as possible. Please limit yourself to one question.
Thank you.
At this kind of the conducting a question answer session if you'd like to ask a question. Please press star one on your telephone keypad I caught in total indicate your line is in the question can you maybe first on Q. If you like to remove your question from Q for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star key.
Our first question comes from line Anthony Powell with Barclays. Please proceed with your question.
Hello, Good morning.
Good morning, Anthony.
Morning.
Question on cash burn and capital allocation.
How comfortable are you pursuing some of these opportunities like capex acquisitions with cash burn 50 million a month hotel level do you see caslen come down more before you.
Can you with Capex or would you consider maybe reducing capex, if past wednesday to be levels or for a long period of time.
And they were thinking about the business today is really quite simple liquidity is king.
And we are being a very thoughtful about.
How we're allocating funds for Capex in 2021, a week, it's something we talk about as a management team all the time and you know if we don't see a the situation improves.
You can expect to see us cut back I with respect to potential acquisitions, although from a capital allocation perspective, we have the flexibility to invest in up to $1.5 billion, a acquisitions with existing liquidity subject to maintaining $500 million of the.
Quit at eight I'll make a couple comments with respect to lab that number one a there aren't many opportunities in the marketplace today I, we expect who see.
Investment opportunities the latter part of this year and into next year as that as special Servicers and other vendors.
Resolve issues with a their borrowers and in some instances properties are gonna come to market and other instances properties are gonna be recapped.
But it's the same thought process with respect to buying hotels at this point in time.
We have to be comfortable that we're gonna have they are right a minor liquidity to ride through the crisis.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.
Good morning, everyone morning, Mike.
Jim You mentioned, a big number as potential cost savings can you maybe give us some insight into the conversations you're having with the brands and then how receptive. They are all those reductions that you listed.
Yeah, I, you know I want to point out that the number that we.
Discussed was between 101 hundred $50 million and permanent cost savings.
And we were very careful Mike to use the word potential cost savings.
Because we have to reach agreement with our operators.
And it's going to take some time to implement.
The cost savings on a permanent basis. So I would tell you that they are very receptive I think you're going to see and you've already seen today at Hilton as an example, a meaningful reduction and their corporate headquarter staff I think you're likely to see it. Unfortunately, a at the other brands as well.
And those out those functions and many instances relate to the shared services that are above property and we think that there is a good potential that.
We are going to be able to achieve these cost savings overtime.
Thank you.
Thank you. Our next question comes from the line as Shaun Kelley with Bank of America. Please proceed with your question.
Hi, Good morning, everybody. Jim can you talk you talked about a sequential set back or downturn in your markets.
Could you give a little bit more color. There do you think we see an industry data that the industry has leveled off but we haven't seen really a step function lower in occupancy levels, even in some of the Sun belt markets for the hotel, Dave we've probably seen more abrupt turnarounds in restaurant and other data.
Could you just give a little maybe a little bit more color about what you're seeing in some of those I think you called out 13 markets, where there's been some regression I'm just a little bit more color that'd be helpful. Sure absolutely Shine you know it it is.
As we think about it and maybe we were.
Looking at the potential performance.
In an optimistic way I because of the a forward bookings we saw for the fourth of July weekend in particular.
And I'll talk about one market that from our perspective was very meaningful and that is Miami Beach.
We have the one hotel South Beach, we opened that property in early June.
We saw good forward bookings and.
You know I going into the fourth of July weekend, we expect that occupancy in the 70% plus range.
I didn't materialize because they the mayor shut the beaches shut the bars or as we all know there was that a surge in cases in Florida, and we ended up running around 20% of occupancy. So I think there's good news and bad news and.
And what happened there that the good news is that there is a lot of pent up demand and whenever the virus is under control. We fully anticipate that people are going to get that back on the road and you know and day and continue to want to travel and to have a good experience and.
A luxury property obviously the bad news is you know there was a surgeon cases and there's nothing we can do about that I mean, we're all waiting as an h. and to get the pandemic under control and I think everyone's waiting for an effective vaccine or vaccines or or therapeutic add to allow.
People to get back up back to business. So other markets.
You know continued to do well over the fourth of July as an example.
The risks to Ritz Carlton in Florida, the rich SAP, Naples, and the Ritz Amelia Island.
Both ran occupants season of the sixties ER and achieve day, the ours of $600 at those rates were higher than same time last year. So again, we think if we hadn't seen the surging cases in Florida that we wanted them better than we did at those properties. So if I talk about.
You know seeing a deceleration it's out it's really based on our expectations.
Thank you very much.
Thank you Sir our next question comes in light of Neil Malkin with capital One Securities. Please proceed with your question.
Hi, everyone. Good morning morning nil.
Oh I just wanted to go back to you.
Group commentary made.
And it's about 2021 group booking below.
This year.
And you want to give more color mills I understand that and then with with the group.
Maybe talk about the.
The landscape for maybe the back half of next year.
In terms of people, who have cancelled in 2020 or incremental people no groups, where maybe getting optimistic on what next year could look like.
Sure.
I think as they the message around group was that our total group revenue pace for 2021 is down high single digits for Oh for next year over the same period of time.
Last year.
And most of the they cancellations that occurred in 2021 to have occurred in the first quarter. So.
That the businesses hanging in there certainly for the second half of the year you know, we all hope it's going to show up we all hope by the end that we are going to have a a vaccine and and or a therapeutic and we'll continue to to see groups one to get back into the hotels and have their meetings I guess.
And they you know the positive is that our tentative.
Business for 2021 is up 30% over the same time last year. So that just goes to prove that there is a lot of pent up demand.
And we are fully confident that that that group will recover we've always said that the way to SAP a recovery was going to play I was with drive to leisure transient first.
I would business trends in second and which grew blast and I think thats exactly how things are playing out.
Okay. Thank you.
Thank you. Our next question comes from the line that Bill Crow with Raymond James. Please proceed with your question.
Hey, good morning, German team pointed to.
The two part question, one topic, which is long term or permanent impairment.
In the first part is on business travel you sounded confident that you thought business travel would recover to to previous levels and decided to.
Some historical information, but we've never really been since dressed like this so we've never had the technology, but that's been proven wins such away. So I'm just curious about your thoughts.
Why we wouldn't see a 10 or 15 or 20% permanent impairment business travel.
In the feature in the second thing is are we seeing a long term or permanent impairment values of hotels in certain markets, where the government reaction.
Two co bid the labor reaction to reopening.
Might change investors views.
Thanks.
Sure.
Yeah I'll take the second question first Bill.
I think it's too soon really too soon to say, what's going to happen to values.
Over the long term I mean, everybody in the in the public space and is trading at a significant discount to replacement cost today I think that we are probably less than 50% of replacement cost I mean, we put some data points on replacement cost in our investor presentation for us for everyone to see into.
It's a very granular analysis that we provided so hot you know some of the assets that.
Better in the market today.
At the height of the pandemic or are trading at a 20% discount to.
Where they were valued that pre covered where they revalue February onest. So I'm confident that that over time as as cash flows recover and as as he but every covers that tab.
That values for the most part across the country.
Well well get back to pre cobot levels and improve I mean, they're gonna be some markets where you.
You know it I think it's going to be more challenging quite frankly, and those are markets, where you are still dealing with supply issues or your or you're dealing with a high cost structures and those assets might have a bit of a challenge or maintaining their value going forward.
But you know for the most part I think we're going to get back to where where we were pre covidien grow from there and you know I I'll just point out. The fact that we had a very strong geographically diversified portfolio. So with no no more than 11% of our EBITDA coming out of anyone market. So we are very well positioned.
Regardless of what happens going forward and your question with respect to business transient and whether or not business transient recovers to to pre covered levels.
I think that technology Ah has been helpful. Today.
You know, we're doing this or any earnings call. It a couple different locations and it's certainly not ideal and I know that we want we would all prefer to be in the same place, but a you know we're being careful in thoughtful about safety and health a as everyone else is but I for one and others are.
I think I'm ready to get on the road I'm done resumed calls I mean, we have had on average 450 zoom video meetings a week at host further for the last six or seven weeks. So I think it's good that perhaps doing today, but we do think that the personal interaction as key notwithstanding that we.
Have looked at.
No what happens if the business transient doesn't come back to to pre Ur Cobot 19 levels Ed.
Think a good job.
Good proxy is as you know, we certainly listen to a the commentary that the airlines gave a you know United has had a point of view that it's coming back fully a delta had a point of view that it might be 20% impaired. So we looked at deltas case of 20% down and so what does that mean to us.
What would we do with our portfolio our existing portfolio today, and how could we remix the business and what would the financial impact be so we looked at really re mixing that business transient drop of 20% to leisure and at the end of the day. It has a de minimis impact.
Act on EBITDA or the impact really is on the EBITDA margin because of that business transient a slice of the businesses our highest rated a piece of business. So yeah, we're ready for whatever.
Whatever comes our way a with respect to the recovery and you know it's good to have a different levers to flex in our portfolio, where we can take leisure or we can take more group and a im really revenue manager.
The company on an asset by asset basis on almost a daily basis.
Thanks, Jeff.
Sure.
Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.
Hey, good morning, everybody.
Any rich.
So Jim just a just a follow up on on the prior question and maybe to combine it with some with another question on acquisitions, you know look at some point I mean, it's premature to maybe talk about this right now, but maybe sometime in the early to mid part of next year hosted its going to have the flexibility to go on a shopping spree of sorts certainly relative to several.
Look in private peers, and so as you think about.
You know what do you know what the portfolio looks like today, what you want it looks like over the next five to 10 years, what's on your screen as far as that is concerned and you know, whereas the PUC going in terms of what you know what whos should look like.
Again, and that sort of five to 10 year outlook as you think about.
What the portfolio needs to look like.
Yeah, Rich I think that you're going to see the portfolio.
Likely look like it looks today, a with a continued focus on upgrading the overall quality of the assets that we own you know is a let me step back for a minute and just talk about how we think about the business today number one I've already said it.
Strong geographic diversification, we think is critical.
An investment grade balance sheet. We think is critical I did to really distinguishing factors and the best portfolio of iconic in every place for hotels in and the industry, which we think we have today. So as we think about building the portfolio out over time.
We like we've talked about this we'd like the model that we have with that you know a strong geographic diversification with a business mix there differentiation in the hotel between a a combination of leisure transient business transient and ER and group so multiple demand.
On generators.
In Charlotte markets with high barriers to entry and that's how we would think about building the at the company over the next three to five years.
Thank you.
Thank you Hi next question comes online.
With Green Street Advisors. Please proceed with your question.
Thanks, Good morning.
Good morning Lucas.
Hey, Jim can you provide an update on the competitive dynamics for hotels versus short term rentals.
Sure.
Happy too you know I would tell you that short term rentals, right now and I'm talking about or be in particular.
I have seen a surge and.
And drive to leisure business as as you know the same thing that we've talked about people want to get out and they have been they have been driving to Arab CMBS and leisure and drive to leisure markets.
Yeah.
Our point of view is as we.
Start recovering and market started opening up the urban markets in particular that are going to be more challenge Oh, we think that the short term rental business. Some of the other platforms that are out there that were out there I don't quite know, what's going on with them, but lyric insider and some of those as well as Eric.
You can be our Gotta base series financial difficulties.
And you know it's difficult enough for hotel owners.
That have Ah Ah well heeled equity partners with them to work their way through a this pandemic with that literally no cash flow or minimal cash flow coming in I think that that issue was compounded by the individual air being deal owners, who have taken on a lot of debt. Unfortunately.
Lee and you know nowhere to turn a when it comes to servicing that that so I think you're gonna see in the urban markets in particular, a a recalibration of alternative accommodations.
Great and then do you expect hotels to permanently close in large numbers and in markets outside of New York.
I I don't know if I can say large numbers today, but I do think you're going to see a lot of hotels a adapted for other uses and markets across the country I think it's too soon to say, but.
There are there are markets that had excess supply coming into this pandemic.
And those markets I think are going to be a fairly challenged <unk> coming out so I would expect that if people.
Again, you know, it's gonna be dependent upon the the where with all of the in individual owners and you know.
What what the dynamic and fundamental looks like and on a market my market basis I with respect to assets that may be taken back by lenders and what those lenders might do with those properties.
And when they bring them to market you know whether the buyer is going to.
Continue to operate that particular facility as a whole tower look to an alternative use so I do think it said, it's a little too soon to say, but we would expect to see this happened across the country.
Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
Hi, Thanks, I'm, Jim you mentioned in your opening remarks at hostess less likely to have to issue equity.
Relative to other hotel rates.
Could you just talk about positions, where you think host would need to issue equity no relative zuklic its relative to maintaining investment grade rating.
You know potentially I'm not passing the revised covenants, which I don't have been has been pushed out of me just maybe just talk in general about the potential to have to do that are once again.
Well look I need.
We think that we are in a unique position along with that you know maybe one or two other reits that are likely to have to issue equity just to de lever the balance sheet. So.
If we look at.
Where our current.
Leverage ratios are in credit covenants are today or you know even better go back and look at where we were at 2019 as we came into this year 1.6 times, Oh leverage and interest coverage at north of nine times.
We don't have to get back to 2019 levels.
Still being a very strong position from a balance sheet perspective, so I don't I don't see instances as I sit here today, where we would have to issue equity to de lever the balance sheets, we don't have to get back to.
2019 levels to have a really strong balance sheet. As you know we will be open minded a round a accretive investment opportunities and use our equity or two out to to pursue deals that make sense for us there will be accretive to our shareholders.
Okay. Thank you.
Thank you I next question comes from the line of Chris.
Thank you Ma'am. Please proceed with your question [noise].
Hey, Good morning, guys, Jim I was hoping to circle back to that some of the commentary about.
Central chain or cost savings on the management side coming out of this does that potentially extend to just less brand managed hotel fewer brand managed hotels or.
Is there is there a possibility of negotiating some of the kind of the base rate fees or anything like that.
Well I don't know they didn't necessarily it <unk> no I I guess, Chris I, what I would take from your your question is that that brand managed hotels are in a good thing.
That's not the way we view the world and we like the affiliation we have with Marriott in Hyatt I, we think they do a fantastic job for us we like they're up the strength of their loyalty program and the strength of there a group sales engines in particular for some of our bigger hotels, you know that said I think that there are properties.
There are more fitting to be a managed centre a franchise operator model those would be they the smaller hotels.
That that don't have a big Guy group component and you know I think the cost savings will will come whether their brand managed or whether they're franchise managed.
Okay very good thanks.
Thank you ladies and gentlemen, this concludes our time a lots of questions I'll turn the floor back to Mr. resilience for any final comments.
I like to thank everybody for joining us on the call today I know these are exceptionally difficult challenging times for all of you are we really appreciate the opportunity to discuss our second quarter results with you and we look forward to talking with you in a few months to discuss our third quarter results hopefully, we'll be able to get together.
In person and then not too distant future. So have a great day integrate we get everyone.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.