Q3 2020 Hersha Hospitality Trust Earnings Call
[music].
Welcome to Hersha hospitality is third quarter conference call all participants will be in listen only mode do.
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After todays presentation, there will be opportunity to ask questions. Please.
Please note that this event is being recorded.
Now I'd like to turn the conference over to Mr., Greg Costello Investor Relations. Please go ahead.
Thank you Nick and good morning to everyone joining us today welcome to the Hersha Hospitality Trust third quarter 2020 conference call today's call will be based on the third quarter 2020 earnings release, which was distributed yesterday afternoon.
Prior to proceeding I'd like to remind everyone that today's conference call may contain forward looking statements.
These forward looking statements involve known and unknown risks and uncertainties and other factors that may cause the company's actual results performance or financial positions to be considerably different from any future results performance or financial positions.
These factors are detailed within the company's press release as well as it does with it then the companys filings with the FTC.
With that it is now my pleasure to turn the call over to Mr., Neil H. Shah Hersha hospitality Trust's, President and Chief operating Officer, Neil you may begin.
Thank you Greg.
And good morning, everyone and thank you for joining us on today's call. Joining me. This morning are Jade Shaw, our Chief Executive Officer, and Ashish Greek our Chief Financial Officer.
We are fortunate to have some encouraging news in the macro environment that could provide a tailwind to our team's efforts across the last eight months.
Emerging consensus around the split government removes an area of uncertainty for business and local governments.
And monday's announcement of a vaccine and other therapeutics, while not a panacea should ultimately be a catalyst for business and international travel.
It will take time to distribute and it will likely be several more months for large companies to encourage travel again, but.
But there is more visibility today than there has been across the last few quarters.
This said the hotel sector still has plenty of wood to chop in the seasonally slower fourth and first quarter, we'll make continued gains in revpar and reductions in cash burn more challenging.
We continue to plan for a sluggish recovery in 2021, gaining momentum in the back half followed by a more robust growth in 2022 and 2023.
We are encouraged by the recent news, but remain razor focused on reducing cash burn and shoring up liquidity as we close out this challenging year.
I'm going to touch on the operations and capital allocation before turning it over to ash for a deeper dive on cash burn and liquidity planning.
Last March we took immediate action to shore up our liquidity and mitigate expenses by temporarily closing hotels.
Our primary goal in the second and third quarter was to minimize cash burn while reopening our hotels.
We achieved this goal as we now have 37 of our 39 wholly owned hotels open and operational.
With the two remaining closed hotels under contract for sale.
This sets up our portfolio to capture incremental demand through the end of the year and to continue to gain market share during the early stages of the recovery in 2021.
Our ability to stay nimble and leverage our flexible operating model in close connection with our independent franchise operator a.
Allowed us to reopen our hotels in a timely and cost efficient manner.
This relationship coupled with our cluster strategy to maximize revenues and generate marketing advantage and economies of scale has given us the opportunity to reduce our cash burn rates and breakeven levels and sets up our portfolio to generate cash flow earlier than our peers as we continue to navigate this recovery.
Great.
It is also yielded positive results over the prior few months of the 28 comparable hotels that were opened throughout the third quarter 21 of these hotels broke even on the GLP line with nine achieving EBITDA breakeven levels.
Leisure travel remains strong post labor day.
Weekends at many of our resorts outpaced pre cobot performance and even provided a base during the week as many travelers have been able to take advantage of remote working and learning lower gas prices and limited weekend sports engagements and other social activities.
TSH data continues to improve sequentially week over week.
Dr. two resorts has been our strongest performers since the inception of the pandemic and that continued through the typically robust summer months.
Our sanctuary Beach resort was the best performing asset again during the third quarter ending the period at 81% occupancy with a $570 HDR, which led to 16% revpar growth.
Success continued in October despite worries that leisure travel would subside after labor day as the resort grew revpar by 22% aided by 55% HDR growth and 70% occupancy.
Down the California Coast the hotel Milo in Santa Barbara continued its momentum from the second quarter and finished the summer on a strong note with third quarter HDR in line with last year aided by a very strong September which saw a 70% occupancy and 11% IDR growth.
Down in Miami in South, Florida, The case count escalation in June and July led to beach closures restaurant, and bar restrictions and curfews, which stifle demand all summer.
Since labor day drive to traffic began to return as Miami in key west of open beaches and have loosened restrictions on restaurants and bars.
We've been able to win market share and saw an occupancy bump of 1500 basis points versus August for our South Florida portfolio.
And that momentum continued into October as our portfolio occupancy grew another 500 basis points for the Buck.
By the third quarter, we began to see northeastern and mid Westerners flying to key west and Miami, Despite COVID-19 concerns.
This pent up demand has continued in the fourth quarter as we are seeing positive trends for our portfolio entering the peak travel season for South Florida.
Rates around the holiday week between Christmas and new years are already in line with last year and with the strong 30% occupancy already on the books across our South Florida portfolio. We believe demand will continue to pickup as we move through the holiday season.
Pre cove at our resorts portfolio, all the drive to from one of our gateway market clusters contributed 25% of our EBITDA.
In 2020, these hotels will be among our top cash floating hotels.
75% of our portfolio remains gateway urban markets.
These markets and loss not only business international and group travel, but have very few attractions for leisure travelers until city's opened back up.
Our teams have done an admirable job, reducing cash burn and ramping to breakeven in this very low demand environment.
As we continued to reopen hotels across our markets. We saw a change in traveler walking through our doors. During the summer we moved from first responders business to our new normal traveler elective healthcare workers and patients design and construction teams outfitting offices to become cobot compliant professional sports teams corn.
Meaning during their abbreviated seasons and personnel related to content and entertainment production on site around the country as studios remained shut and even the occasional micro wedding or corporate buyout.
Traditional corporate travel Didnt return with its usual force post labor day.
Whoever across our urban markets there were employees staying in our hotels to avoid mid week commutes.
Smaller businesses utilizing hotel rooms for office day use and even corporate buyouts for smaller meeting space.
September and October have seen a continued increase in these unique travelers staying in our hotels, we've been working with local universities housing students at the boxer in Boston allocating inventory at our Annapolis waterfront hotel proximate to the U.S Naval Academy and continuing to work with universities in many of our urban clusters for the upcoming.
Spring semester by offering alternatives for the new home housing protocols that are likely to persist through the end of the school year in 2021.
In New York, we saw success around Staycation packages in Brooklyn production teams and Tribeca hosting virtual fashion week events government census workers in White plains, and a pickup in higher rated corporate business from a leading financial services and consulting firms that stay at our Hyatt Union square.
In California, our select service hotels in Sunnyvale, Hows relief business related to the wildfires, while in Washington, DC, Our capital Hill Hotel has seen increased bookings from elevated Supreme Court and congressional activity.
On the West end in Washington are seeing Gregory successfully contracted with various media outlets for increased coverage, leading up to the election last week.
We've expected the lodging recovery is likely to be in lock step with medical investments as it pertains to rapid testing therapeutics and ultimately a widely distributed vaccination right.
Recent developments point to a recovery year in 2021, and we believe the recovery will be most pronounced in our core markets highlighted by Washington, DC, which is a historically strong market following an election year.
New administrations bring jobs increased lobbying on the hill, the likely return of higher rated foreign delegations and an overall increase in corporate and leisure travel.
The Washington, DC market has been an underperformer during the past few years, but we believe that a new administration will spark growth to the region aided by the aforementioned catalyst reduce supply and the reopening of the city's unique demand generators.
We've seen from prior year years that the first quarter following the election and January specifically proved to be a very strong period in this market, whether it's an incumbent or a de novo president.
During President Obama second inauguration in 2013, our portfolio generated 23% revpar growth during the quarter.
In the first quarter of 2017, following president Trump's inauguration, our portfolio Revpar grew by 15% with 57% growth on the night of the inauguration.
The upcoming inauguration is leading to early reservations across our portfolio at rates, we have not seen in Washington, DC in many years.
We believe our unique portfolio in Washington, spanning select service independent and lifestyle and luxury is very well positioned to capture the increased demand to the market during the first quarter as well as throughout 2021.
The recovery in 2021 is not just predicated on favorable comps and increased travel, but also on deteriorating supply.
We've already seen the headlines and consultant forecasts for New York City.
20% of New York's total hotel room, count about 25000 keys could permanently close and every week, we seem to be seeing this forecast come to fruition with another permanent closure.
New York City is dominating the headlines, but theyre corners of every market filled with distressed assets that were troubled to produce margin growth even before the pandemic.
These assets were functionally obsolete prior to the pandemic and their closures will improve the long term supply picture in many of our markets.
The other side of the supply picture is the development pipeline recent reports from Smith travel have showed a large increase in the number of development projects that have moved from either the planning or final planning stages into either the deferred or abandoned buckets.
Industry experts believe this could equate to more than 13000 rooms.
Year to date through September 211 projects in the U.S, representing 56% decrease in the pipeline over the same period last year. These are staggering figures that could continue to increase as our industry works through the recovery and even mirror the great financial crisis, when the supply pipeline declined from a peak.
We have 212000 rooms at the end of 2007 to 50000 rooms in early 2011.
Before actually takes a deeper dive into expense savings and burn rate reductions I want to spend a few minutes on our capital allocation strategy and sources of additional liquidity.
As a quick reminder, we have announced accretive binding sales agreements on for assets in our portfolio with total expected net proceeds of $70 million.
We remain optimistic that these transactions will close but we have provided extensions to the buyers through Q1.
With today's release, we announced a fifth disposition the Sheraton Wilmington, Delaware. We began this process in the summer and are very pleased with the relatively quick execution in today's environment.
New Castle County of Delaware is acquiring the hotel for an additional 19 and a half million dollars and proceeds.
It's about a 2% cap on 2019.
These first.
These first five transactions are all smaller noncore hotels, and we are pleased with the pricing within 10% to 20% of pre covert values and at a combined 21 times EBITDA multiple on 19.
Last quarter, we discussed exploring additional asset sales if we saw improvement in the transaction environment across the last 90 days, even before the election or the vaccine there has been a meaningful improvement in the availability of debt for higher quality lower cash burn hotels in.
Turning to private equity firms there has been an increasing diversity of buyers credible family offices international capital and new domestic entrance to hospitality.
We we assessed future sale candidates in our portfolio by Triangulating buyer interest.
Capital requirements or age of hotel.
And expected growth rate.
The additional five hotels, we launch for sale.
In September and October are emblematic of our portfolio.
And our highly sought after in this environment.
The simple hotels that have remained opened throughout the pandemic.
Our unencumbered of management and onerous labor contracts or are even unencumbered of brand.
And in some cases have assumable financing.
And are approaching breakeven levels.
These characteristics do make these hotels more valuable as visibility increases.
We will see where values come out in the coming months.
And balance liquidity today with reversionary growth tomorrow.
But judging by early interest we do expect to complete several more dispositions across the next couple of quarters.
At this time, we view hotel sales as the lowest cost alternative for capital today.
As discounted hotel sales provide relatively quick liquidity and do not encumber, our capital structure or permanently dilute our equity.
As you May know the management and board of Hersha are among its leading shareholders.
And across this year, we have continued to buy our common equity in the open market as we considered a remarkable value for an exceptional portfolio.
Weve constructed a portfolio with high absolute revpar so.
Sector, leading margins and minimal capex requirements for the foreseeable future.
All in the most valuable markets in the United States with few if any encumbrance.
Our portfolio is both attractive to a vast buyer pool.
And still offers incredible operational and financial leverage to this recovery.
With that let me turn it over to actually to discuss in more detail, our burn rate reductions and balance sheet.
Hi, Thanks, Neil and good morning, everyone.
This quarter successful completion of our hotel reopening strategy that began during the second quarter and concluded with the opening of our two Ritz Carlton.
Not have been possible without the close working relationship we have with our third party independent operator.
Due to our focus service strategy, we're able to comfortably restart our hotel with the confidence that we can attain GLP breakeven levels within 45 days of reopening.
Results this quarter at our open hotels validated this confidence.
As the number of hotels that achieved GLP breakeven levels rose over the balance of the quarter.
During July 21 of our 28 opened hotels broke even on the GLP line.
This increased to 22 hotels in August and 25 hotels in September.
Our teams expense savings and revenue management strategy also yielded positive EBITDA results for a portion of our open hotels over the course of the period.
Once again during July nine of our 2008 opened hotels achieved breakeven EBITDA level, which increased to 11 hotels in August and 16 in September.
Our operational strategy allows us to run our hotels I'm very lean labor model until demand reaches levels wanting additional staffing.
We're able to do this by applying various cost cutting strategies, such as cross utilizing management personnel as well as outsourcing in job sharing within the hotel and across our clusters to lower our overall expense base.
As demand begins to pick back up and occupancy levels start to improve from these low levels. We will begin to phase back in staffing levels and other operating expenses in a very deliberate and calculated manner.
Our model allows us the flexibility to continue to operate our hotels at current staffing levels at our breakeven occupancy approximating, 35% all the way up to 55 needing 60% at some of our hotels.
With our open portfolio generating 37% occupancy in the third quarter, we estimate that revenue from the next 20 percentage points of occupancy gains should drop down to the GLP line at 75% to 80% flow through generating outsized margin gains and highlighting the operating leverage inherent in our.
Wholesale.
We would anticipate seeing these gains in the first half of 2021 as the recovery progressive.
Margin should continue to see momentum as we get deeper into the recovery in the back half of 21 and 22.
We also anticipate labor force headwinds to be much more favorable over the next few quarters with reduced SMB and smaller answer ancillary service departments, such as the landing spot.
This development along with the various expense savings implemented by our asset management sustainability team.
Just grab and go breakfast options reduced in room amenities housekeeping optimization and utility savings should bolster our margins through the recovery in post pandemic.
We estimate that many of these changes will lead to a 10% reduction in housekeeping labor and our per occupied room costs for items, such as breakfast and in room amenities.
We also believe that there are significant opportunities to reduce our non housekeeping labor expense.
Through zero based budgeting, we've found ways to operate more efficiently and are confident that these savings will exist even when occupancy has returned to more normalized levels.
As an example.
We currently maintain an average FTD count at our hotels of 21 employees.
Versus 60 ft in February of 2020.
Employee counts will increase as occupancy ride, but changes in our operating model should allow for additional labor cost reductions in the 5% to 8% range, leading to sustainable margin expansion of 150 to 200 basis points post pandemic.
During the third quarter steadily increasing occupancy and expense savings enacted during the prior quarter resulted in a reduction of our cash burn across the portfolio.
Our property level cash burn ended the second quarter at $3.4 million and decreased sequentially over the balance in the third quarter with a two and a half million dollars cash loss on property in July and ending September with a $1.7 million property level cash loss.
This brought the total property level cash burn for the third quarter to $5.7 million.
25% below our forecast at the beginning of the period.
At the beginning of the pandemic, our corporate level cash burn, which includes all hotel operating expenses.
You heard us DNA and debt service was originally projected to be $11 million per month.
Our corporate level burn rates steadily declined over the six month period ending in September reducing from 10, and a half million for April to 6.6 million for July and ending the third quarter was $5.9 million burn rate in September.
Our corporate cash burn for the third quarter totaled $18.2 million.
32%, 32% below our second quarter burn rate and 27% below our initial downside scenario forecast.
Our third quarter in October results, which saw occupancy to advance over the period. Despite precarious COVID-19 condition and fear of a post labor day headwind for leisure travel resulted in breakeven levels that improved since our second quarter earnings call.
Based on this quarter's results and our forecast for the fourth quarter, we are comfortable debt on the property level basis, our entire portfolio breaks even within 5% Revpar decline.
Occupancy is approaching 35% to 40% and a 25% to 30% decrease.
At the corporate level, our Revpar breakeven occurs at a 45% revpar decline factoring in 55% to 60% occupancy at a 20% discount.
The transition to an item that is cash flow positive after more than two years, we've settled our insurance claim related to hurricane aroma, which significantly damaged our two largest south Florida hotels, the Cadillac and the parrot key hotel.
During the fourth quarter, we expect to collect insurance proceeds between $7 million and $8 million, which we recorded in our fourth quarter results.
During the third quarter, we spent $5.4 million on capital projects, bringing our year to date spend to $21.8 million.
We anticipate a significantly reduced capex load for 2021, primarily focused on maintenance Capex and life safety renovation.
Roughly 40% below our 2020 spend.
Since 2017, we've allocated close to $200 million from product upgrade and ROI generating capital projects across more than 50% of our total room count entry.
Entering 2020, we had substantial built in growth projections for our portfolio based not only on market demand trend, but on these recent capital improvements driving new and loyal customers to our hotel.
Which was unfortunately offended by the pandemic.
The majority of our rooms oriented transient hotels have been renovated to the taste and preferences of today's traveler.
And with very minimal Capex moving forward, our portfolio will experience very little disruption at the onset and through the recovery.
As of November Onest, we've drawn $126 million of our $250 million senior credit facility and ended the quarter with $20.2 million in cash and deposits.
We remain very encouraged by the resiliency of the capital markets throughout this pandemic.
The markets remain open and available at every tier of the capital stack and.
And we've seen the first signs of traditional asset level financing from commercial and regional banks looking to deploy capital into the sector.
We believe there is a significant amount of capital forming both on the debt and equity front.
That will be seeking attractive opportunities in lodging over the next several years.
And we're still in the early stages of this capital formation.
We continue to have an active dialogue with our bank group and and we plan to accelerate conversations over the next few months rugs.
Regarding the parameters surrounding our covenant waiver test on June Thirtyth 2021.
Until then all lines of communication with our Bank group remains open and constructive.
As highlighted in our earnings release last night, we now have five assets under contract for sale.
We remain constant contact with suppliers in the four assets that we announced earlier this year.
And we recently granted the buyer of the 23 hotel in extension will close in the first quarter of 2021.
And this resulted in our receipt of an additional deposit or 500000 total transaction.
As none of the buyers need material financing, we remain confident these transactions will close in a timely fashion next year.
Over the past week, we went under contract for sale for the shares in Wilmington, Delaware for 19 in house knowledge.
And we have received a material hard deposit from the buyer.
We anticipate this sale will close before the end of 2012.
The proceeds from these five transactions will be utilized to pay down our debt and we plan to utilize any additional proceeds received from any of the five assets. We currently have on the market for debt pay down and for additional working capital to bolster our liquidity.
As we entered the final months of this unprecedented year for our company and our industry.
As we look towards our pillars of strength to navigate our path.
Our unique owner operator relationship, which has yielded significant expense savings over the past nine months are.
Our cluster strategy, which maximizes revenue and economies of scale, while capturing unique demand opportunities in our market.
And the more than 20 years of experience in the public market to the team.
For Jane Nielsen.
All the while we continue to explore various opportunities to fortify our balance sheet to give the portfolio extensive runway as we navigate towards stabilized demand.
Over the next several years.
So this concludes my portion of the call. We can now proceed to Q, an age where we're happy to address any questions that you may have.
Operator.
Well now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then too.
This time, we'll pause momentarily to assemble the roster.
First question comes from our Recliner BMO capital markets. Please go ahead.
Okay.
Thanks.
Okay.
Mr. Cline are you there.
Sorry about that thanks.
Good morning.
It sounds like you haven't seen much impact.
From rising covered cases, but yes as as we move through the fourth quarter ends. The beginning of next year can you talk about the impact that seasonality.
Specifically on on maybe occupancy as well as cash burn and whether or not that can still improve from what youve, Jeff yes.
Seen towards the end of the third quarter.
Yes sure. If this is ashish for October we really Didnt see results that will materially different than September occupancy.
And our cash burn was effectively the same for October as it is in September we from a seasonal standpoint, we would anticipate a little bit of a pull back in November and December historically October is the strongest month of the quarter.
For our portfolio.
I think that on the cash burn side.
We're not seeing anything today that would lead us to a material.
Deterioration in cash burn for November and December we like I said little bit of a pullback just based on seasonality, we would anticipate that some of our resort markets, especially in South, Florida and in California.
We will take we will remain fairly strong throughout the for fourth quarter and will really pick up steam in the first quarter.
Thanks, and then in New York City, specifically, a lot of the occupancy went away with with frontline workers. So that 40% level, we saw in the third quarter kind of contract for sustainable level here.
And how is that kind of evolved.
With the frontline workers gone away.
Yes, our it can get started on that you know the we went from we had times during the summer, where we were reaching 60% occupancy in New York as we were serving essential workers.
It was at very low rates, but we were.
Contracting at 90 to $100 and and filling our hotels to 60% and it was a productive use of a period, where there was very little demand in the marketplace by August most of that Isnt.
Essential worker kind of demand dissipated.
And we replaced it with what we refer to as kind of the norm the new normal traveler here in New York. It is a mix of business and leisure and friends and family.
But it was not enough to make up for all of the essential worker demand. So we've dropped from 60% to 40% and occupancy.
And there wasn't enough business travel in that mix to totally offset.
The loss in occupancy so revpar did decline relative to the summer but has been aer has been each month has shown improvement in New York from August September to October.
So we're encouraged by.
The level of.
That we can.
Approach kind of breakeven levels at this low level of demand in New York, but we are still very much looking forward to.
The results from a more widely vaccinated more.
More widely distributed vaccine and other therapeutics to really get business travel going.
So were.
Does that answer your question art.
Yeah, Yeah that's helpful.
Thanks, Thanks for all the color.
Thank you. The next question is from Bryan Mayer B. Riley. Please go ahead.
Yes. Good morning, So just a couple of quick questions I think in your prepared comments you mentioned something about the pre co bid business was kind of a 25% leisure 75% gateway urban.
What would you say that that is now in the fourth quarter. What do you think it will be in the first half of 2021.
Brian It's it probably is tends towards 44.
40, 45% eight as.
We have not we don't have a precise calculation for you for Q4 Q1.
But we would expect that for it to be a meaningful part of cash flow.
Production during those quarters.
The most.
Yes.
Okay, and then as we get this back the news that came out yesterday weve heard a lot about the hotel closures.
The in our kind of that 20% number do you think that that CLO repaid stalled as maybe some potential sellers.
Decide to take a wait and see approach to a vaccine will ramp up demand in the first half of 2021, and maybe we don't get that level of closures and its something less like 10 or 15%.
Yes, Brian it is possible depending on how quickly.
The world starts traveling again, but but a lot of these hotels I'd say it was.
The vast majority of that 25%, 20% of the inventory was already not making money pre covance.
I'm just is there the cost load on the with unionized workforce is older hotels that just weren't kind of the preferred choice. So they were they were just not attractive to a lot of.
Business travelers are differentiated leisure travelers.
And they were expensive to operate just because they were big or older structures that didnt.
So I do think that most of these are going to close will they reopen in three four years I am sure. Some will there will be in a re format is kind of it's kind of like the Grand Hyatt in Midtown East, It's taking 1200 rooms out 250 rooms will come back, but they will be.
It will be less rooms that will be more higher quality rooms. So I think for the next several years, we can count on.
Meaningful reductions in supply.
But it does depend but I guess, what's underlying that notion is that we feel like they recovery, although the vaccine as good news the election uncertainty is behind US we still do believe it's going to be a couple of two to three still very two challenging quarters in New York, and we believe that owners and less.
Enters our New York assets have already found that for for those kind of older Big box hotels that have difficult operating structures, there is a higher and better use.
Than losing a few bucks every year.
Right I mean, we were surprised me something like the Hilton Times square closing I mean, that's a hotel I mean, it is a hotel not like an old product that you convert Honda.
That did close in that location I, just can't believe that it won't ultimately reopen maybe under new ownership.
So just kind of thinking along those lines the little perplexing.
Yes, I think thats possible, there will be some that that will reemerge, but.
But I think what we've seen like the nine that have been announced so far those true permanent closures.
I don't see any of those reopening for example.
But you are right any any kind of major recovery, if we have a hockey stick like recovery there will be less closures.
Okay, and then last for me at the five hotels that you have for sale, our buyers gravitating towards any particular asset height within those five.
Within those five we're getting a lot of good interest in there there theyre all in different markets around the United States. So there there's representatives from each of our markets nearly there.
There is a branded.
Branded and independent hotels in that group of five.
And but what brings what is the commonality among them is.
Fee interest real estate unencumbered of management.
And.
And really high quality.
Locations and real estate.
So we're seeing good good interest across across all of those those kinds of assets right now.
Right, you've probably seen just kind of the they are still not huge transaction activity and volume, but but every month. There is several more hotels trading in markets like ours and assets like ours, and so where we have seen a turning point in for at least this kind of.
Asset.
For in the transaction market.
Great. Thank you.
Thank you next question comes from David Katz of Jefferies. Please go ahead.
Hi, good morning, everyone. Thanks for all of the detail.
Respective.
As we look out in our geography wise and I know you've talked about.
Obviously in a prior question you know New York and what your ultimate views are in a post Colgate world.
I Wonder if we could shake out loud about.
Which markets you would likely to be in that you are not and whether there is prospect if you could trade out of some answers from others.
Given that everyone's perspective on life may have changed a little bit.
Yes.
David I hesitate.
I am too I think we all hesitate.
To make a.
Major shift in focus because of this event, it's clearly going to change the world there will be impact there will be new trends it will accelerate some older trends.
But we do not think that cities are are dead.
We do continue to believe that leisure and business transient oriented hotels will be attractive.
But to your point, we do have.
We do have it.
We were.
Potentially over exposed to New York City. It it remains our largest EBITDA gen.
Generating market pre covance.
And that will balance as south as our assets in South Florida ramp up in some of our other renovations ramp up but it is an area that we would consider.
Additional asset sales in that marketplace.
We've seen across the last across the summer, we've seen three or four transactions of.
Of similar kinds of assets non union cash flowing newly built assets and we do see the the market following a bit but I'd say that New York is is still six to 12 months away from.
From kind of rational pricing of new investors into the marketplace now with this recent with the news of the last three to five days that could change quicker, but but where we stood.
Stood November Onest, we felt like a handful of markets required a little more visibility to get good returns from a marketing process I would put Manhattan in that have we'd put Seattle in that camp.
But that said we continue to stay close to the market. There is one of the five assets that we are marketing today is is in New York City.
And as the market starts to improve and we start to see more visibility and we achieve kind of breakeven levels on that portfolio I do expect that next year, we will sell.
Sell additional hotels in New York City.
But the time it feels like it's still a couple of months away.
Understood and if I can just ask a follow up with respect your comment earlier about finished changing over the past 90 days in terms of the ability to sell hotels.
I wonder what insight there might be around whether it is the inclination of equity meaning.
Some notion that weve approximately bottomed or is it more on the debt side the availability of debt capital that is the primary driver or some combination thereof.
In some combination thereof, but its for the same reason, it's just visibility and for equity to have visibility on the levels of cash burn expected for an asset.
And for lenders to be able to.
To think through that visibility as well and to consider how much cash reserves, they need and the like but what's what's been I think as the summer.
With each month of the pandemic is we got to kind of month six after this had another month seventh of the of the pandemic you were seeing that select service hotels, some extended stay hotels some kind.
Kind of smaller format independent hotels were able to reach breakeven levels.
And in these kind of really high quality forever markets lenders were attracted to to getting spread on on this kind of really high quality real estate that they never had the opportunity to plan and so you're seeing lenders not you are seeing banks and regional banks, but you're seeing.
A lot more credit funds and credit funds used to be in the business of transitional loans. So they were doing.
Higher octane loans to help you do a redevelopment or or.
To take something that required a lot of ramp up in today's world. The whole world is transitional because there isn't a lot of income and no credit funds are finding that they they they raised a lot of capital and they have the ability to get 500 to 600 point spreads above LIBOR.
And get into some great assets and they feel like across the next year or two they would be able to securitize them or sell them more cut them up.
And some of them are actually doing it very quickly and doing it.
Within a month or two and so we're seeing the market develop on the lending side.
And were and that was probably that's what it required for us to go to market with.
Some of our Chunkier hotels, because you didnt need a rational debt market to sell hotels $50 million to $100 million in value.
So that was the turning point for us, but that is a function of visibility and cash burn which has been coming down.
Across this period.
Got it thank you very much.
Thank you next question is from Tyler, but story of Janney capital markets. Please go ahead.
Hi, Good morning. This is Jonathan on for Tyler Thanks for taking our questions first one from me.
Looking at the co. Good vaccine announcement yesterday I know, it's early days, but how do you think the conversations with lenders will change for the industry now that it seems is on the table in terms of lean, leaving seadrill provider thing on things like debt covenants.
Hi, Jonathan I think.
Good.
It's more the outlook as Neal mentioned I think that.
This is a very good piece of news and we believe that over the next few months there will be additional good news on both vaccines and therapeutics I think.
The lending community will look at this and say look we we do see the light at the end of the tunnel. It just got a lot brighter and Ito in the portfolio like ours you'd look at cash burns that should be going down precipitously as they have been and I absolutely think it makes the discussions easier.
It's not.
Yes. These have not been contentious this discussion throughout this pandemic. The markets have remained opened the lenders have been very supportive but.
But at the same time seeing improving.
Improving trends on the medical side is going to be a very big tailwind for everybody to get there.
Covenants restructured their debt in place to get through this pandemic.
Okay, great. Thank you and then switching gears can you just provide some color on the booking window, you're seeing and if you see any expansion in that as we moved into the fall month.
Yes, Unfortunately, not not much not much improvement on booking windows at least for kind of mid week travel and.
And the like even weekend travels still is still pretty low.
Last minute when we you know we are encouraged by Christmas and New year's week in South, Florida, I think we'll start to see some uptick in some of our other resort markets for that period of time as well.
We mentioned in some of the prepared remarks.
That we are booking out to inauguration.
In Washington, and we have been surprise I'd say we were.
Very pleasantly surprised like Monday, we're talking to our sales team.
Because it just because it feels like the electric just happen immediately.
There the amount of bookings that came through for our entire Washington, DC portfolio was remarkable just in a handful of days. So we've reached nearly.
North of 70, 80% occupancy mid week of inauguration at all of our hotels in Washington.
And and demand is still building an 80 ours as I mentioned in prepared remarks are on.
Really impressive so were first for these kinds of special events special holidays, you are seeing advance bookings, but for the everyday transient travel traveler, which pre cove. It might have been giving us tend to 20 days of visibility maybe seven to 15 days little visibility today is more like.
One to two days.
And remains.
Remains challenging.
Okay, great. Thank you for all the detail very helpful. That's all for me.
Next question comes.
Comes from Chris Woronka Deutsche.
You bet.
Please go ahead.
I will ask you a high level kind of theoretical question.
As we begin to think about the brands.
Having to maybe focus more on conversions and the soft brands to get their unit growth to where they want it to be in next couple of years.
Do you worry at all about.
Broader commoditization trends within the industry and you guys have an independent portfolio you have brands you have soft brands and so I think you guys are kind of uniquely well positioned to speak about this I mean, how much of a concern is that that that.
You can create as many brands as you want but ultimately you.
You have a hotel room it if it's a good product.
It's going to compete on price and location.
We tend towards that.
That view.
Chris We do think that in the end of the day. It is location quality differentiated experience that you can deliver in a hotel through design or through service.
And and we do believe there is an advantage for newly built hotels among most travelers.
But brands are important and I think they are even more important for.
For.
B assets or B locations, where you have a great location and a differentiated product it's a little less.
Have a driver of performance.
But in in markets in locations where.
Where do you need a advantage to offset some some other issues then the brands has been very helpful. I think across the last three to five years, we've seen just the brand proliferation truly kind of confused consumers, but it has built.
More frequent stay.
Members for all of these brands. So it is a it is a significant channel.
If you're already paying fees to a brand that channel is comes for free and provides 40, 50% of your bookings. So there's there's clear value there.
But I think that a lot of owners have seen that.
They can operate in a independent format and get advantages not only on cost, but really on the rate side even.
And so there's there's not one answer that fits for for the sector and for but for US. We do feel we are unique we are much more focused at the asset level, we are really happy with our brand relationships.
But it will be we wouldn't be disappointed to see a lot more unit growth from the brands through conversions.
But we've seen this before and so.
With new development, and they're they're driven by unit growth and so we.
We expect that it may come, but we don't think that we're particularly vote.
Vulnerable to it frankly, we feel like our people and our assets and.
Allow us to go independent and a lot of locations. If we get if we became very concerned about.
The contribution from brands vis-a-vis there their fee structure.
But Chris I should acknowledge I should acknowledge one thing is that we've had a good performance from our independent hotels throughout this period, but.
But the branded hotels.
The things like the employee rate program, which used to be a real thorn in our side pre.
Pre pandemic, where you had to a lot inventory at $79 or $99 in great markets. Those things have actually been a bit of a benefit throughout the summer and throughout the fall. So we have done.
For some of the the Cadillac we do some very attractive redemption business. These days for their frequent stay program and we are getting some of these different brand channels that have been productive but.
You asked an easy question I gave you a pretty convoluted answer, but it's just we see benefits in running independent hotels and branded hotels and we make a decision based on a particular location assets.
Okay. That's very helpful. Appreciate all the.
Ill detail that's all from me thanks.
Next question comes from Michael Bellisario of Baird. Please go ahead.
Good morning, Ron.
Hey, Michael.
Big Picture question question kind of a follow up to that last one.
As you guys look out a few years and how that's really far away, but what do you envision the portfolio looking like especially as you're considering asset sales now I know you talked about lower New York City exposure, but is it.
More branded independent select service full service are there new markets do you exit any markets really what the shifting the portfolio composition that you're thinking about today as you look forward.
You know Michael you you know our portfolio, we do have a kind of hybrid model. We really appreciate the margin and the lower cash burn of select service, but we do very much appreciate and enjoy.
The higher growth rates and the higher kind of net EBITDA per key profitability of some independent lifestyle hotels, and some higher end hotels when markets are recovering.
And we do like that balance and we like having that balance in most of our markets and we'd like to cluster around that so that you can I think it was a case in point kind of how we were able to reopen hotels across the last six seven months by having that kind of mix of assets, we were able to start with limited service.
And then bring in independents overtime and then finally in the last month or two open our luxury hotels, all the while ensuring that we were opening in lock step with our.
Our goals around GLP breakeven within 45 to 60 days and and so I think that that flexibility and having that mix of assets serve.
Serves us well.
And and it's one that we will we'll continue to have in our portfolio I think if we look out 12 months, let's say I would expect that we would have less New York City contribution.
But across the rest of the portfolio. We're selling is kind of representative of the portfolio. So if anything we're just selling assets or a little bit older.
A little bit more stabilized.
But they are in each of our markets.
So I think you'll continue to see South Florida.
The West Coast.
Boston, Washington, Philadelphia, and New York in our.
Portfolio mix.
There will just be several less assets in each of those in each of those markets. A year from now is is kind of the current thinking.
I think the only market that we consider like more significant sales is new York as we've discussed.
So thats good thats kind it will continue to be very focused on I think this the cycles clearly shown the importance of fee interest real estate you know for years. There was like this notion that go.
Ground lease doesn't matter because.
And last longer than.
And then your lifetime, but thats just not the case.
Ground leases are very often highly inflexible leverage and and it makes it very difficult in difficult times like this to refinance assets or to bring in new investors and the like.
I think we'll continue to remain focused on hotels that require less capex overtime.
And we will continue to be active recyclers of assets. So that once it's at that point, where it requires more meaningful capital we will trade the asset.
And I think those are that these are the features I think that are there attractive to to hotels, when you're selling them. It kind of leads to a portfolio that is more liquid we think than most of our peers.
And we think it's the kind of portfolio that actually is very attractive to lenders you know like we've been talking about the credit facility.
I think you have to keep in mind that.
Well underwater.
His cash flow there.
They are not doing that many.
Gymnastics about total debt right now our debt to EBITDA right now because EBITDA is just so far off from reality. So it's.
The replacement cost its cash flow and so we'll continue to be a company that focuses on assets.
That can cash flow in and what seems like a very volatile world.
Got it that's very helpful. And then just one quick follow up for Sheesh back to your commentary about lender discussions where does the preferred at fit into that mix today, how are you thinking about that.
Yes, we've had conversations with with some of them about this I think that when we go back in 21, there will be some discussions on catching up the accrual whether it's 100% or just starting a program, where we catch up the dividend accrual on the preferred and.
I can't say, if it's in the first quarter or second quarter Bye.
I think that the.
The lending groups will be amenable to that.
Thank you.
Oh.
The next question comes from Anthony Powell of Barclays. Please go ahead.
Hi, Good morning question on.
How did it it'll be another inventory and evolve over the summer and fall market. So you see inventory.
Inventory come back in a urban markets.
Older somewhat ball it how it had an impact to your portfolio.
Hi, Hi, Brent that there was 35000.
Room reduction of Air Bnb rooms in New York City.
We've heard of.
Very meaningful reductions in Miami and in California.
I think the momentum that had had started around kind of regulating.
And more.
More closely monitoring and overseeing air bnb activities in major cities continued throughout this entire pandemic.
I think the affordable housing lobby will continue to be a.
Standard bearer of of this site along with.
Hospitality.
Tax.
Yes, the taxes and like so we do think that there has been reductions that.
We've just we're not quoting anything in our scripts and things related to it because we're just not sure how credible all the data that we're reading, but but we've seen we saw something else that like 70% of air Bnb inventory is technically illegal New York and so thats going to lead to so there is a lot of.
There is a lot of energy.
Energy and momentum there and I think we'll see that in this recovery in New York because that.
We that was a we call that shadow supply in 2000.
14, and 15 and 16 I think it took until 17 18 to really realize that.
This was hurting our business very meaningfully.
Yes, Anthony while I think on that we we along with the planned IPO of there being be we would hope that there is additional disclosure in additional.
Transparency and their part to limit the amount of those kind of illegal rentals that are been happening across all these markets.
Right makes sense.
And just stepping back what markets. Most importantly is the international inbound and getting new Yorkers mine the Miami any other parties to call out.
When do you see that you might start seeing some of the international restrictions starting to be lifted.
Next year.
Yes, all of our markets.
Our pretty significant kind of international inbound and that was one of the drivers of our portfolio construction frankly.
And.
But new York and Miami are the most significant New York is about 20% of kind of our business pre co bid was international of some kind.
In Miami, which which actually has much as even more international airlift. It was still for our portfolio was still only about 10% to 15% of our business mix pre covance.
The other markets that are notable on international we're calif.
California.
The coastal California law as well as the coast.
Particularly from the UK, but also other international travel and then Seattle.
It was a market that got a lot of international travel from Asia and elsewhere, I think we used to always tout Philadelphia and San Diego because they were the two highest growth international markets. They were coming off of low bases, but they were markets that were seeing 10, 15% kind of international growth year over year.
Due to airlift and just the world discovering these more mid sized cities.
So international is a very significant part of our business.
When do we expect it to turn but were I think the vaccine is absolutely going to help.
And we're seeing it in Miami at least in South Florida, you do have flights returning now we have multiple flights a day from Brazil, and Colombia and Peru.
All of the Caribbean Islands, Mexico, and so there is business travelers coming back and forth right now because of.
Business they have in the region.
And there is a little bit of leisure travel, but not a lot.
And.
But when will it return I think it will it's just I mean, we're not sure not sure at the day like it's really.
We're not counting on it.
Until the back half of 21.
Maybe this vaccine.
Accelerates it a little bit, but we do think that international travel will be slow to recover.
Right.
Yes, yes, there was talk about like marriage Air bridges from New York's a lumbering or whatnot, starting ramping giving that I'm guessing that yes, yes look for a ride for a variety of the maybe pushed back but I don't know.
I actually wanted to lock down our bearish.
Sprint will transition Im not sure if that's still on the table or not.
Yes, I I have not heard of it being off the table again that but it's but it is possible to get both both cities have had stresses that they're dealing with related to coated.
Yes, there is.
Yes, I am in New York, we are still not seeing a lot of international travel.
Yes, theres a its still its still going very slow to develop Anthony.
Okay.
All right. Thank you.
Next question comes from Bill Crow with Raymond James. Please go ahead.
Thanks, Good morning, Neil.
You bet.
Tiers are deliberate you pretty.
Press of cost cutting and.
Two part question on that number one is we're coming off the end of a long cycle in 2018, and we're obviously at depths we've ever seen before so how much of the cost cutting is just a matter of maybe.
Maybe we had gotten a little bit content to the little bit fat and happy in.
In 2018, not necessarily talking about your specific.
Operators, but.
As the industry overall weak was there room there to cut.
That's just low hanging fruit and then the second part of the question is really how long do we have before we see amenity creep.
For the US this pie eating contest for the brands starts to rollout a day.
Additional perks for gas and things like that.
Thanks.
Phil.
If I could get US started then.
We do think that it.
So in in lodging cycles towards the end of cycles in order to kind of win that win market share and to to retain guests you do start to layer in a lot of the matthijs.
And a lot of VIP giveaways and frequent program frequent stay program.
Tchotchkes and special items, you do start to feel like you need to have belstaff at.
Select service hotels because.
You need to kind of keep both demand and control and.
And move in and out of the building.
You start to get tempted to have water in every room and have cookies, the front desk and it definitely happens overtime.
And so there was clearly room to cut.
But this was this was this provided a crew opportunity for zero based budgeting, we were able to just kind of go to zero and then restart these hotels with four people with five people.
And the brands were very I have to give them credit at least in the franchisee model.
They were very flexible with how owners provided what they consider to be critical services are critical offerings.
There was we all move from breakfast buffets to.
To to go bags.
They were not.
Very prescriptive and exactly how to do that.
And so we had the flexibility to to really cut very deeply and then as we've kind of reached as we started to add occupancy weve, we clearly had to add more teams back and.
We've started to guest expectations have started to include.
In a in certain hotels to have a bar open or to have some food items available.
For Brett.
Breakfast and for dinner.
And so were we are slowly, bringing those things back, but they've been driven by the kind of business and the customers on the ground. It still hasn't been something that brands are are pushing.
I think what we'll start to see early next year is probably from most of the brands just a little bit more guidance around how they want to see food and beverage delivered and served and they may start to require.
That the to go bags have put.
Particular branded items in them.
That there is a certain level of after a certain level of occupancy you do need to have an additional staff person on.
Available to during breakfast or during evening times. So you could see some of that coming back. We we think that it's we're not hearing from the brands it's going to be.
Immediate and and a major focus, but we would expect across 21, there will be some of those things will start to come back.
But as Ashu mentioned in his prepared remarks, we do think that there's some real permanent savings here.
And it's primarily on the labor side, but does include the things that we used to put in our rooms for for the brands and and.
And so we think it is very reasonable to assume that across the next three years of the recovery that a 100 to 200 basis points of margin advantage is possible for even a super lean portfolio like ours, because as you know we've always run a pretty tight shift.
But even for a portfolio like that we think that there is meaningful.
Margin advantage for the next three years, let's say.
I appreciate the answers thank you.
[music].
This concludes our question answer session I would like to turn the call back over to management for closing remarks.
Great well. Thank you with no more questions will will will say, thank you again, Jay Ash and I are all here in the office in Philadelphia. If anyone has any further questions and we are looking forward to seeing all of you at upcoming Investor conferences, we have new rates and then three.
Sell side conferences coming up so we look forward to seeing all of you soon at least across the screen, we'll see you soon.
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